New Rules for Residential Mortgage Lending: What You Need to Know
The Office of the Superintendent of Financial Institutions (OSFI) has released the most recent changes coming to residential mortgage lending guidelines. The purpose of these changes was to reduce some risk within the market; one of the biggest changes is a new stress test for borrowers who want to avoid mortgage insurance. These guidelines will become effective on January 1/2018.
This means that even if you have at least 20 per cent of the home’s purchase price to put down, you have to go through a financial test to show that you can make your mortgage payments should interest rates increase.
As superintendent Jeremy Rudin indicated in a press conference, “We certainly see the risks that are caused by household indebtedness, by the high house, property values in some markets…and the risks posed by potential changes in interest rates.”
This new stress test is not the only change, though. There are new limits on bundled mortgages, or co-lending, which refers to loans that come from a combination of federally regulated lenders and providers who have not gone through the regulation process. The purpose of this is to keep lenders from skirting their way around rules that have established lending limits for them. Financial institutions that are federally regulated also have to keep and follow loan-to-value ratio guidelines that change with the dynamics of the housing markets and the wider economy.
These guidelines basically dovetail with what OSFI had proposed back in the summer. At the time, the changes received criticism for the possibility that they might elevate costs and reduce access to funding for some borrowers.
OSFI has indicated that if the stress test proves to be unnecessary or of the interest rates change significantly. They did change the stress test from the summer proposal, which set it at the contract rate plus two percentage points. Now the stress test is the greater of the five-year benchmark rate from the Bank of Canada or the contract rate plus two points. This actually makes the stress test apply to more homebuyers; the purpose of the change was to keep borrowers from looking for the lowest interest rate – which could put them at the shortest term.
There are some positives to emerge from these changes. Borrowers will have to buy responsibly instead of maxing out the purchase price. Banks and other lenders will not be able to use combination loans to get around LTV ratio limits. However, brokers will still be able to do this, so long as the buyer qualifies for both loans in terms of debt ratios. This is why using a mortgage broker is advantageous.
Other advantages include the fact that private lending options will provide even more quality options, although lenders will be looking more closely at borrowers’ exit strategies to make sure that they can qualify for traditional financing when their private loans come to an end. Plus – if you’re putting less than 20 per cent down, you already have to go through this sort of stress test to get mortgage insurance, so this doesn’t affect you.
Do you have questions about your own situation? Call Amansad Financial today, and we can tell you how these new changes will influence your home finance options.