Hey Guys!
I thought passing along a heads-up of possible Mortgage rules changes would be beneficial. My intention is to share possible rule changes, and how that will effect Mortgage affordability.
For now, the possible rule changes are at the stage of “public consultation” and are likely to be implemented in the second or third quarter of this year (3-9 months from now).
Quick Background: OSFI Saves The Day …
The Office of the Superintendent of Financial Institutions (OSFI) is Canada’s banking regulator. They make the rules for Banks/Financial Institutions to play by. And like most regulatory bodies with rules, the rules of the game change over time.
OSFI has been slowly tightening Canada’s Mortgage market since 2012. Their biggest, and now most note-worthy Mortgage rule change, was implementation of the “stress test“.
At the time (winter 2017-2018) many Real Estate professionals were calling for the banking regulator to back off. Now with the benefit of hindsight, the “stress test” likely saved a lot of financial pain—considering where home values and Mortgage rate are today.
The Mortgage qualifying stress test rate is the greater of a) the contract interest rate plus 2.00% or b) 5.25%. The payment from this higher interest rate is used to calculate the applicants maximum home affordability. Essentially, the max affordability is lower due to the high stress test rate.
OSFI is proposing further rules that influence Mortgage qualifying …
Possible Restriction #1: Income-To-Debt Ratio
This debt load restriction is not borrower based, but lender based.
Here’s what I mean …
A certain percentage of applicants borrow at the top end of their allowable Mortgage capacity. All good.
This Mortgage rule restriction would limit a percentage of a banks overall Mortgage portfolio that contain these high-levered borrowers. The thinking here is this would encourage the spread of high leverage borrowers amongst many institutions.
For example, say you qualified for a Mortgage but were requesting a Mortgage 4.5± times your combined family income. If the lender has too many other borrowers at this income-to-debt ratio capacity they might decline the application. Perhaps another lender would have capacity to allow more high leveraged borrowers?
Possible Restriction #2: Debt Service Coverage
Right now, a borrowers debt borrowing capacity is limited to 39% of before tax income. This means less than 39% of before tax income service the Mortgage payment, property tax, heat and half condo/association fees.
In some situations, for some financial institutions, for some clients, this qualifying rule can be circumvented (I.E., ratios above the recommended 39% gross-debt-servicing). OSFI might either change this qualifying rule all together, or strictly enforce it (no exceptions).
For example, a bank like RBC might make a gross-debt-servicing Mortgage qualifying exception because of a clients liquid assets with RBC. Another example is lenders outright allowing higher gross-debt-service ratio exceptions in exchange for higher down payment amounts, higher interest rates and lender fees.
Possible Restriction #3: Mortgage Qualifying Rate Update
Another possible Mortgage rule change might be to the stress test. Right now, the stress test is 2% above the contract Mortgage rate OR 5.25%. Whichever is a greater number.
For example, the stress test interest rate might be different for a 1-year fixed Mortgage versus a 5-year fixed Mortgage?
Conclusion:
Love it or hate it, Mortgage qualifying rules have been helping smooth out the peaks and valley’s of our Real Estate market. Imagine how much more systemic risk their might be in the market without current qualifying rules? Likely more.
With high rates pushing back on runaway Real Estate prices, and overall tighter liquidity in Canada’s Real Estate market, some say adding more Mortgage qualifying restrictions at this time is like beating a dead horse.
Maybe so.
Let’s look back on this article in 24-36 months.
I hope you found this helpful!
Talk soon,
Chad Moore
P.S.
My long-time readers know I put on a tinfoil hat occasionally :). I’m sure you’ve heard the term “shadow banning” before. I understand this to mean an online profile receives limited, or no, exposure to the platform the profile is on. The user might be suspicious of reduced likes/comments/engagement etc, but they won’t know for sure why their profile is “down”. With looming Mortgage rules changes I’ve heard rumors that lenders and Mortgage insurance companies will “shadow underwrite” files as if pending Mortgage rules are in place. I guess the thinking is they stop a rush of activity trying to “get in” before new rules take effect. Again, this is my anecdotal thinking. I don’t think basing a major, and long-term change in your life around possible Mortgage rule changes is a good reason to “rush into something”. Like the implementation of the current stress-test …in the long term, the market adjusts.
P.P.S.
If you do have plans to sell, purchase, refinance or renew—reach out so we can plan accordingly.
