We’ve reviewed this morning’s OSFI announcement and here is what we can share:
OSFI’s new rules take effect immediately and no later than Jan 1st, 2018. The changes apply to all federally regulated lenders and to all uninsured mortgages. Commercial mortgages remain exempt.
All uninsured mortgages must now be qualified at 2% above their contract rate or the Bank of Canada Benchmark rate, whichever is greater. The Benchmark rate ensures a qualification floor so borrowers selecting a shorter term variable rate, or a 1 year mortgage, are still qualifying at the Benchmark Rate. For example;
* clients choosing a conventional 5 year fixed term at 3.25% will now qualify at a rate of 5.25% OAC.
* variable rate clients with a contract rate of 2.50% OAC would qualify at the higher 4.89% Benchmark rate as it is greater than their contract rate plus 2%.
The net effect of this stress test is that buying power is reduced by an average of 20%. This is by far the most meaningful change. We expect 10 – 15% of mortgage applicants will no longer qualify. Existing clients with mortgages will not be affected but the new rules will limit the ability of some consumers to shop their mortgage at renewal since new qualifying guidelines apply in moving to a new lender.
The next amendment to B-20 is for conventional lenders to clearly define a ‘non-conforming’ loan. In the past, lenders had some flexibility when faced with deficiencies in income, credit, or security. OSFI now expect lenders to have a clearly defined set of parameters where they identify what is non-conforming. We expect this change will result in fewer exceptions to lending guidelines and less common-sense lending.
Maximum Loan-To-Value Ratios
In dynamic markets such as the GVA and GTA, OSFI expects lenders to impose flexible guidelines regarding maximum loan amounts to mitigate potential market risk. We expect maximum loan amounts to now vary depending on market conditions. Where this is a rapid acceleration or cooling in home prices, lenders will now be expected to adjust their lending policies accordingly.
The practice of combining a 1st mortgage and non-conforming 2nd mortgage that together exceed a lenders maximum loan to value is no longer permitted. This new rule will have a minimum impact on the market as only a handful of regulated lenders were bundling a non-conforming 2nd mortgage behind their maximum 1st mortgage. The ability to register 2nd mortgages behind existing 1st mortgages remains. The new prohibition of 1st/2nd bundling is for new mortgage originations only.
Income and Loan Documentation
OSFI have set a high standard and expect underwriters to follow this standard. OSFI’s response to industry’s request to allow underwriters to apply judgment was acknowledged, with OSFI remaining firm on loan full documentation to ensure capacity and fraud mitigation. Documentation will remain a sticking point moving forward. For individuals, federally regulated lenders will be relying on personal income filed with CRA. Income that is tax sheltered, retained in a Corporation, or split with a non-applicant etc. will only be considered by non-conforming lenders at a higher rate of interest.
These changes are significant and I expect they will affect housing sales as the pool of qualified buyers will be reduced. Inter-generational assistance, such as gifted equity or co-signing, will continue to help bridge the gap. Vacancy rates will remain tight in Greater Vancouver as those who can no longer qualify to buy will need to stay in rental housing longer. I also expect some buying & investment activity to spill over to the commercial real estate sector which will remain more flexible.
Should you have any questions as to how this might impact your own personal purchasing power in the future. Please Contact Us!