December 16, 2019

Lending rules on mortgages tightened

Tweaked guidelines meant to cushion consumers, lenders against rising rates

The federal government has finalized regulations that will make it tougher for Canadians to qualify for uninsured loans, affecting consumers with down payments of 20 per cent or more.

In guidelines published Tuesday, the Office of the Superintendent of Financial Institutions tweaked its original proposal forcing borrowers to also qualify based on a potentially higher Bank of Canada five-year posted rate, a restriction Ottawa forced on all governmentbacked loans back in 2016. The OSFI rules are intended to cushion consumers and lenders against the threat of rising interest rates.

“OSFI hasn’t just tapped the brakes, it’s jumped on the brakes with both feet,” said Rob McLister, founder of RateSpy.com, adding that at least one in six buyers with 20-per-cent equity could be affected by the new guidelines.

“Uninsured borrowers can qualify for a mortgage today at rates as low as 2.97 per cent on a five-year fixed. In a few months that hurdle will jump to almost five per cent. Those folks will need almost 20 per cent more income to qualify for the same size mortgage they can get today.”

The changes are effective Jan. 1, 2018, and, based on the current five-year posted rate of the Bank of Canada, all buyers borrowing from OSFI-regulated institutions would have to qualify at 4.89 per cent, though they would still pay the lower rate offered by the bank. The tougher requirements will not apply to mortgage renewals.

The real estate industry had been lobbying for changes to the final guidelines, worried tougher borrowing conditions would squeeze more people out of the market. OSFI said it received more than 200 submissions from federally regulated financial institutions, financial industry associations, other organizations active in the mortgage market, as well as the public.

A key argument that has continued to be lobbied is that more stress testing will just send consumers to alternative lenders not regulated by OSFI, which oversees about 80 per cent of the market.

“The banks might be a little bit happy to keep their hands tied collectively,” said Finn Poschman, president and chief executive of Atlantic Provinces Economic Council. “Make no mistake, however. The change will drive business to the non-federally regulated sector. The risks in the more or less unregulated sector used to be dismissed because the numbers were small … That sector will now grow even faster, and what might have been a problem for OSFI and Canada Mortgage and Housing Corp. will become an SEP — somebody else’s problem.”

Supt. Jeremy Rudin acknowledged, in a call with reporters, the stress test could push prospective homebuyers away from the banks to lenders that are not federally regulated. But he said OSFI’s primary consideration is ensuring the safety and soundness of the banks it regulates at a time when household debt is at record levels, home prices have ballooned in some markets, and interest rates remain near record lows.

“We are very aware of the potential migration risk,” Rudin said. “That does not change our mind that this is a valuable (tool) … It’s still a net positive.”

The key change Tuesday, from an initial July announcement, was the closing of a loophole that some believe would have sent buyers into cheaper but more volatile short-term loans to qualify, an important consideration as the Bank of Canada raises overnight rates which most prime lending is tied to.

An original proposal from OSFI called for consumers with lowratio loans to qualify based on the rate on their contract plus 200 basis points or two percentage points. The guidelines now require the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate plus 200 points.

The new rules will also require lenders to enhance their loan-tovalue measurement and limits so they will be “dynamic and responsive to risk” and are updated as housing markets and the economic environment evolve.

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