The New Mortgage Lending Guidelines
Since 2008 OFSI, the regulator of Canadian Banks has made many changes to the rules that lenders must follow when providing mortgage financing.
The last round of changes to the lending guidelines was released on October 17, 2017. These rule changes are scheduled to come in place on January 1, 2018. And although the lenders have until then to put the new rules in place OFSI also expressed a desire that the lenders move on making these changes ahead of the January 1 date. It would not be a surprise to see lenders start to bring in these changes in early December.
These rule changes apply to all residential mortgages that are provided by federally regulated lenders. At this point, provincially regulated like credit unions are not subject to these rules but OFSI has been in discussions with the provincial regulators hoping that they will bring in similar rules.
The two changes that will have the biggest impact relate to the application of a stress to ensure borrowers will be able to handle their mortgage payments if interest rates go up and the requirement for lenders to enhance their loan to value measurements.
The Stress Test
Currently on conventional mortgages if a borrower took a five year fixed term mortgage the lenders could use the contract rate to determine if a borrower would be able to make their mortgage payments. The current five year fixed term mortgages are in the 3.39% range. Going forward the lenders will have to use the greater of the Government of Canada’s benchmark rate, currently 4.89% or the contract rate plus 2%. If the borrower wants a five year fixed term mortgage the qualifying interest rate would be 5.39%.
For borrowers that were looking to purchase a home at their maximum possible purchase price these changes will reduce their buying power by about 20%.
This will not impact all buyers as based on my experience over the last two to three years most buyers were not purchasing homes up to their maximum abilities. Many buyers had already looked at the amount they could potentially borrow and had decided to borrow a lower amount to keep their monthly budget in line.
Enhanced Loan to Value
Currently the banks could lend up to 80% of the value of a home. That said many lenders have already brought in sliding scales that reduces that 80% amount by allowing 80% on the first $1 million and a lesser percentage on values over that amount. OFSI has not set a specific target but they will be monitoring the banks mortgage portfolio’s to ensure that they are below the 80% maximum.
Based on recent history these rule changes will have the greatest impact for people at the margins and may force some of them to look at some of the alternative lending options. These options will mean higher interest rates but for some this will not be an issue.
For many buyers I do not think it will have a big impact on their ability to move forward with their planned purchase or it may mean that they look at a different location or type of property.
Please call me at 604-961-2400 if you have any questions about the new mortgage rules.