Under OSFI's Guideline B-20, a borrower in BC with a $1,200,000 uninsured mortgage at a contracted rate of 5.5% must qualify at what rate?

Q: What is the correct answer to: Under OSFI's Guideline B-20, a borrower in BC with a $1,200,000 uninsured mortgage at a contracted rate of 5.5% must qualify at what rate?

The correct answer is 7.5%, the contracted rate plus 2%. Option B is correct because under Guideline B-20, the qualifying rate is the higher of the benchmark rate (5.25%) or the contractual rate plus 2%. For a borrower with a contracted rate of 5.5%, the stress test rate is 5.5% + 2% = 7.5%. Since 7.5% exceeds the 5.25% benchmark, the borrower must qualify at 7.5%.

Q: What background knowledge is needed for this Mortgage & Real Estate Finance question?

OSFI's Guideline B-20 applies to federally regulated lenders and requires a mortgage stress test for all borrowers. The formula is: qualifying rate = higher of (contractual rate + 2%) or (benchmark qualifying rate, currently 5.25%). For insured mortgages, similar rules apply under CMHC guidelines. In BC's expensive markets, the stress test significantly reduces borrowing capacity — a buyer who can afford $5,000/month in mortgage payments at their contracted rate might only qualify for a much lower mortgage amount when tested at the stress test rate.

Q: What is a good way to remember the answer to this Mortgage & Real Estate Finance question?

The B-20 stress test formula: take your contract rate, ADD 2%, then compare to the benchmark (5.25%). Use whichever is HIGHER. Think 'Contract Plus Two versus Five-Twenty-Five — pick the bigger number.' On the exam, always calculate contract rate + 2% first, then compare to 5.25%. If contract + 2% > 5.25%, use contract + 2%. If contract + 2% < 5.25%, use 5.25%. The higher number always wins.

Q: What exam tip applies to this Mortgage & Real Estate Finance question?

The stress test is the HIGHER of two numbers. Always calculate both and compare. In the current rate environment where contracted rates often exceed 4%, the contract + 2% will usually be the binding constraint, not the 5.25% benchmark.

Q: How does this Mortgage & Real Estate Finance concept apply in real world practice?

A buyer in Vancouver has been offered a 5-year fixed mortgage at 5.5% for a $1,200,000 uninsured mortgage. Under B-20, the lender must qualify them at 7.5% (5.5% + 2%). At 7.5%, the monthly payments would be approximately $8,300 (on a 25-year amortization), and the buyer must demonstrate sufficient income to support this payment level, even though their actual payments at 5.5% would be about $7,300.

Question

Mortgage & Real Estate FinanceBCHARD

Under OSFI's Guideline B-20, a borrower in BC with a $1,200,000 uninsured mortgage at a contracted rate of 5.5% must qualify at what rate?

Answer Options

A

5.5%, the contracted rate

B

7.5%, the contracted rate plus 2%

C

5.25%, the benchmark qualifying rate

D

6.5%, the contracted rate plus 1%