OSFI (The Office of the Superintendent of Financial Institutions) who regulate all Federal Lending Institutions such as Chartered Banks and Trust companies, released a public letter last week which outlined new measures they are considering to slow the growth of housing debt and stabilize our housing market. After review of OSFI’s letter here is a summary and potential impact of conventional mortgage rule changes to mortgage consumers:
Eliminating Bundled Mortgage Loans
Since OSFI and default mortgage insurers such as CMHC curtailed low down payment loans on properties valued over $1.0M, some federally regulated lenders have offered bundled loans which combine Institutional 1st and private 2nd mortgages to greater than 80% loan to value to meet consumer demand. While this is a small segment of total loans arranged, OSFI is considering the prohibition of bundling 1st and 2nd mortgages to greater than 80% by OSFI regulated lenders.
Minimal as bundled loans are considered a niche product. The proposal will cap purchases to a maximum 1st and/or 2nd mortgage to 80% financing. Existing homeowners who wish to access home equity and no longer qualify under tougher qualification guidelines can still seek standalone secondary financing OAC.
Harmonizing The Stress Test for Conventional Mortgages
OSFI is proposing a higher interest rate stress test for uninsured mortgages. This would level the playing field between insured and uninsured mortgages.
Significant as conventional borrowers with greater than 20% down, or those buying properties valued at greater than $1.0M have, to date, been qualified at their contract rate of interest when selecting a fixed term of 5 years or greater. Should a stress test or higher qualifying rate be implemented on conventional mortgages, this will affect 15% – 20% of buyers in the conventional space. The proposal is for conventional borrowers to qualify at a rate that is 2% higher than their actual contract rate. This translates to approximately 20% less buying power. Should this proposal be passed, we see the need for higher declared income for self-employed clients (there will be a trade-off between paying higher income taxes or mortgage interest rate), additional family assistance such as co-signing or gifted equity and, a boost for alternative/private lenders to assist borrowers who no longer qualify for Institutional financing.
Scaling back loan to value and discretionary requirements in high-end markets
OSFI is proposing that lenders introduce additional measures to cut back their maximum mortgage loans in heated markets such as Vancouver or Toronto.
Significant as most lenders already have conservative sliding scales for high-value properties. As a veteran team of mortgage brokers, we feel lenders are already doing a fine job of mitigating market risk. If income requirements increase through the proposed 2% higher interest stress test, we expect a flattening in the higher end market segment without the need to limit max loan amounts in our region.
OSFI is accepting industry feedback until August 17th. We will keep you posted on what the final release will look like. Bottom line is that we expect qualifying for conventional mortgages will be harder when the new guidelines are released later this year. Planning for a purchase and how income is labeled will become more important when the new rules are implemented. This is where our experience as professional mortgage brokers can be invaluable as government rules continue to evolve. Thanks again for your support and have a great week!