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Not B20 Regulated? Stress Testing Still Matters

It’s been more than a year since the new B20 mortgage regulations came into effect in Canada.

These rules are well known to mortgage lenders nationally as they changed the scope of stress testing, making it required for uninsured mortgages with a down payment of more than 20%.

The stress testing has reportedly kept Canadians out of the housing market, but it is also intended to ensure that Canadians can afford their mortgage among changing interest rates, shifting property values, and high household debt levels.

The B20 regulations are only mandatory for federally regulated lenders. However, certain lenders outside of this criteria, like some credit unions, decided to comply as well.

Some smaller lenders, who were not forced to comply, opted to forgo the stress testing, using that in their marketing. If a mortgage is denied by a big bank due to the stress test, a smaller, alternative lender might be able to help.

It seems to be working — the October 2018 Teranet Market Insights Report found that the number of Canadians are turning to private lenders is on the rise.

But with that in mind, is foregoing stress testing wise?

Beyond B20, there is value in stress testing — which is, at its core, evaluating what your portfolio would look like if your assets were valued less.

Even if you are outside the scope of new mortgage regulations, this is still important to consider. After all, changes in the housing market don’t just affect the A-lenders — they affect everyone.

How can you prepare for these changes if you have no understanding of what your portfolio is currently worth?

A recent report from RBC Economic Research warned that housing affordability is continuing to worsen in Canada. The ownership costs for a home bought in the second quarter of 2018 now consume 53.9% of a typical household’s income. In larger areas like Toronto and Vancouver, housing carrying costs could claim upwards of 75% of a household’s income.

And the driver behind this issue isn’t necessarily only an increase in housing prices. It’s also due to an increase in mortgage rates that require a larger share of a typical household’s pre-tax income to cover the mortgage payments.

A downward turn could affect every part of a lending operation, including your future recovery measures. If your clients were not able to afford their mortgages and began defaulting, would you have enough resources to collect?

It could also impact how you approach mortgage renewals.

So, what is the solution — or the middle ground?

When you have a high volume of mortgages on the books, testing your whole portfolio can seem like a massive undertaking. But it doesn’t have to be.

Bulk property data enables you to buy the information all at once.

For instance, with Purview’s property tools, you evaluate your entire portfolio using our customized bulk data solutions. These solutions draw from the same property data that federally regulated lenders are using for stress tests — all from the Province of Ontario Land Registration Information System (POLARIS).

From there, you will need to decide how often to “stress test.” Quarterly, semi-annually, or annually, depending on market conditions.

While it may not be mandatory for smaller lenders to comply with B20 regulations, it is still well worth your time to perform due diligence and make sure you are prepared should change occur.

Purview makes that easy to do. Access our bulk data tools and more.

Call us today at 1-855-787-8439 or visit www.purview.ca.

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