New mortgage stress test rules have borrowers flocking to alternative lenders
Mortgage brokers say the borrower rejection rate from large banks and traditional monoline mortgage lenders has gone up as much as 20 per cent after Canada's banking regulator imposed a new stress test for home buyers who don't need mortgage insurance.
As a result, alternative lenders are seeing an uptick in business as brokers increasingly direct home buyers toward borrowing options that are beyond the reach of the Office of the Superintendent of Financial Institutions' newly enacted tighter lending requirements.
Clients who don't meet the bar are turning to private lenders, mortgage investment corporations (MICs) and credit unions, which are provincially regulated and not required to implement the stress test, said Carmen Campagnaro, president of Pro Funds Mortgages in Burlington, Ont.
Campagnaro is one of the brokers who said rejected loan applications to traditional lenders have risen by 20 per cent since Jan.1, when OSFI mandated a new stress test for uninsured borrowers, or those who have more than a 20 per cent down payment.
Private lender Fisgard Asset Management Corporation in Victoria is seeing an influx of borrowers and "better quality business" said Hali Noble, its senior vice president of residential mortgage investments and broker relations.
"A lot of these people should be bankable," said Noble. "But they're not."
The guidelines, known as B20, are aimed at curbing risky lending amid rising household indebtedness and high home prices in some markets.
In order to get a loan from a federally regulated lender, home buyers have to prove that they can service their uninsured mortgage at a qualifying rate of the greater of the contractual mortgage rate plus two percentage point or the five-year benchmark rate published by the Bank of Canada. An existing stress test already requires those with insured mortgages to qualify at the Bank of Canada benchmark five-year mortgage rule.
Superintendent Jeremy Rudin has said OSFI is aware the stricter rules could have unintended consequences, such as sending borrowers towards more risky lenders that are out of the regulator's purview.
"We can't control what we can't control," he said in October.
"Our mandate is focused on the safety and soundness of the federally regulated institutions... It isn't something that we favour but it isn't something that we have an authority to prevent."
Since the revised mortgage guidelines came into force, both the Bank of Canada of rate and benchmark rate has risen, dealing a "double extra whammy" to borrowers, said Dave Teixeira, vice president of operations, public relations and communications for Dominion Lending Centres.
Dominion mortgage brokers are seeing a higher rate of rejection and clients have to submit multiple applications to various institutions before finding a lender that works, he added.
In turn, their brokers are submitting 80 per cent more applications than last year, Teixeira said.
"Normally, we would see our volume going to the big banks and monolines, and now we're seeing a little bit more of that, roughly up to 20 per cent... moving over to credit unions."
However, some credit unions have voluntarily implemented the new stress test or tightened their own requirements.
Quebec credit union Desjardins Group has been applying OSFI's new mortgage rules in full since Jan. 1.
"We believe it represents an effective way to protect consumers against interest rates variations," said Desjardins spokeswoman Valerie Lamarre.
Vancouver-based Vancity Credit Union has voluntarily increased the stress test its members must meet to qualify for a mortgage.
Rick Sielski, Vancity's senior vice-president of risk, would not disclose the mechanics of the stress test and said it was too early to gauge the impact of the new guidelines.
"What we're really trying to do is make sure we're serving our market, serving our members in a responsible way," he said.
The higher bar for borrowers is also shifting business to riskier lenders.
Harold Gerstel, better known as Harold the Mortgage Closer from his television ads, said his Toronto-based mortgage arm is seeing an influx as well.
"We're definitely getting more business. Whether it's a substantial change, it's too early to tell," he said.
The new rules are sending better quality demand down the credit line, said Robert McLister, a mortgage planner at IntelliMortgage and the founder of RateSpy.com.
"The demand is shifting down the ladder, so you have these less regulated lenders with higher risk tolerance now seeing materially more business. And they can charge more, and they can be pickier with the types of borrowers that they lend to."