On October 17th 2017 the Office of Superintendent of Financial Institutions announced several new regulatory changes that will take effect on January 1st, 2018. Here is a summary of what you need to know about the upcoming changes.
Important Terms To Know Before Reading
Insured Mortgage / High Ratio Mortgage: Less than 20% down payment.
Non Insured Mortgage / Conventional Mortgage: 20% or greater down payment / equity.
Bank of Canada Rate (BOC): The 5 year fixed posted rate (currently 4.99%).
Contract Rate: The actual rate offered by the lender to the consumer.
Benchmark Rate/Qualifying Rate: Stress Test: Bank of Canada Rate OR Contract Rate +2%, whichever is greater.
LTV (Loan To Value): The size of a mortgage compared to the value of the property securing the loan.
TDS: A total debt service ratio (TDS) is a debt service measure that financial lenders use as a rule of thumb when determining the proportion of gross income that is already spent on housing-related and other similar payments.
1) QUALIFYING RATE STRESS TEST TO ALL NON INSURED MORTGAGES
Non insured mortgage consumers (buyers with a 20% or greater down payment) must now qualify using a new minimum qualifying rate. The minimum rate will be the greater of the five-year benchmark rate published by the Bank of Canada OR the lender contractual mortgage rate +2.0%.
How does this affect the mortgage consumer with a down payment of 20% or more?
The biggest impact will be on the amount in which the homebuyer will be able to qualify. Previously, the homebuyer qualified at the rate offered by the lender. Now, the homebuyer must qualify at the benchmark rate which is the higher of the Bank of Canada Rate (currently 4.99%) OR the rate from the lender plus 2%. This applies to all terms, fixed and variable rates.
The stress test for non-insured mortgages applies to both fix rate and variable rate mortgages. On variable rate mortgages, the rate at time of funding is based on Canada’s prime rate (presently 3.20%) +/- a given margin. Today’s average variable rate is prime – .45% (3.20% is prime – 0.45%) = 2.75%. So applying the stress test of the greater of the two qualifying rates; Bank of Canada is 4.99% and the actual rate of 2.75% + 2% = 4.75% thus the BOC would be the qualifying rate to use since its higher.
*The chart above is based on 35% GDS RATIO (Gross Debt Service Ratio) and a 25 year amortization. **In order to qualify for any variable rate, as in the past, you must qualify at the BOC rate.
What if I don’t qualify at best rate lenders?
The qualifying stress test rule will also apply to alternative lenders (also know as B lenders) who are governed by OSFI. Any federally regulated lender will have to adhere to the stress test ruling. This will be all mortgage lenders in Canada excluding private lenders and Credit Unions. To counter this much higher qualifying rate, these alternative lenders will have the discretion to revisit their own income-todebt-ratio (TDS) calculation policies.
For example, presently these alternative lenders have the ability to approve mortgages with a 50% TDS (banks are more like 42% on average). Under the new stress test rules, alternative lenders will most likely have to increase the TDS policy to a higher figure to offset the higher qualifying mortgage payment under the stress test rate calculation. DLC will communicate to our network as soon as lenders are able to communicate their decision.
2) LENDERS WILL BE REQUIRED TO ENHANCE THEIR LOAN TO VALUE (LTV) MEASUREMENT AND LIMITS TO ENSURE RISK RESPONSIVENESS
Mortgage lenders (excluding credit unions and private lenders) must establish and adhere to appropriate LTV ratio limits that are reflective of risk and updated as housing markets and the economic environment evolve. We are awaiting more details on this policy from lenders. As we have new information, we will update this document.
What does this mean?
OSFI directs lenders (excluding credit unions and private lenders) to have internal risk management protocols in higher priced markets (sometimes called “hot real estate markets” like Toronto and Vancouver). This is a continuation of a policy already in place. Many mortgage lenders have been following the principles of the policy for the last 10 to 12 months.
3) RESTRICTIONS WILL BE PLACED ON CERTAIN LENDING ARRANGEMENTS THAT ARE DESIGNED, OR APPEAR DESIGNED TO AVOID LTV LIMITS
Mortgage lenders (excluding credit unions and private lenders) are prohibited from arranging with another lender: a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law. This is often referred to as “bundling” or “bundle partnership”.
What does this mean?
For example: a consumer applies for 80% LTV mortgage and the lender can only approve 65%. The lender then partners with a second lender for the additional 15%. The original lender then “bundles” the 15% LTV mortgage with the original 65% mortgage to form the complete 80% LTV loan. This is no longer permitted as per OSFI.
HOW CAN DOMINION LENDING CENTRES HELP?
Now, more than ever, new homebuyers and existing homeowners are going to rely on mortgage brokers for their guidance and expertise in navigating through these regulatory changes.
There are differences among the many lenders that we have access to and the greatest value a broker can provide is the knowledge of the lending environment and in choosing which lender is best suited for your needs. Dominion Lending Centres will continue to educate our mortgage professionals as new data arises. This way you can be kept up to date with all of the latest information.