There’s been a lot of talk recently about new rules that are being proposed by OFFSI. For those of you who aren’t familiar with OFFSI, they are a government body enacted by the parliament to focus on the safety and soundness of federally regulated financial institutions. They are charged with protecting depositors, policyholders, creditors, and institutions. They ensure that federally regulated creditors and insurers are doing a good job and doing things in a safe and positive way so they don’t damage our banking system or the economy.
About 80% of the mortgages in Canada are held by lenders that OFFSI supervises. They don’t just supervise mortgages, they also supervise insurance companies. Their goal is to keep an eye on any vulnerabilities in the market and to prevent any issues from developing — or if they do develop, keep them from becoming widespread issues that may cause an institution to fail.
On July 6, 2017, the Office of the Superintendent of Financial Institutions released amendments to their Residential Mortgage Underwriting Practices and Procedures, developed in June of 2012, which are the guidelines for residential mortgages in Canada.
OFFSI is constantly looking at ways to make sure that our banking system is secure. They are concerned with high levels of consumer debt in Canada and so they feel that — with the average Canadian’s household debt being quite high — some changes are required to the rules in order to tighten and strengthen things in the country. Again, this is the body that oversees the banks. Thus, these rules and regulations come from the top and then filter down to those who are looking to borrow money.
This comes on the heels of a new stress test introduced recently that requires high-risk borrowers (buyers that put less than 20 percent down), to be subject to an additional stress test on their mortgage.
The stress test enacted earlier this year stated that you would have to qualify not just at the rate that the bank was giving you but also a rate that was an additional 2 percentage points above that rate. A borrower seeking a 3% mortgage would also have to qualify for a 5% mortgage.
We’ve had five years or more of abnormally low interest rates, and this has caused household debt to increase. If interest rates were to increase quickly or a severe economic shock were to occur, OFFSI’s concern about people’s abilities to pay off their debts becomes an issue. They want to get ahead of any risks and essentially protect people from themselves.
When the rules were applied earlier this year, they were applied only to those who were considered to be high risk. Those rules were implemented but didn’t have much of an impact on the wider market, though it did force those who were considered to be high risk to either buy more affordably or hold off and rent for longer. The rule changes make sense; while it makes it harder for first-time buyers to purchase homes, it also protects them from becoming too indebted.
In July, OFFSI proposed a number of new rules. Again, they’re concerned with such high levels of household debt and that there may be a problem in the future. They aren’t anticipating any economic issues or housing market issues — their job is to get ahead of and mitigate potential risk, if a nightmare scenario were to occur. With rising levels of consumer debt, they feel it’s a good time to make changes to their residential rules.
OFFSI’s new changes have been reacted to negatively throughout the real estate industry, development industry and banking industry. They warn that these proposed measures will negatively impact borrowers. OFFSI’s mission is to err on the side of caution. They want Canada’s financial system to remain one of the safest and most stable in the world but critics argue this is unncessary, extreme and counterproductive to the governments stated goals of creating housing affordability. They believe it’s unncessary to punish the segment of the market that is of least risk to the system.
The most impactful change is the extension of it’s 2 basis point stress test to ALL borrowers, not just high risk borrowers (buyers putting down 20% or less). They want all buyers, not matter how large of a downpayment to qualify 2% above their posted rate at the bank. This is a major change to the greater mortgage market. This change will decrease the average borrowers budget by about 20%, a significant amount of money.
Right now, the maximum loan-to-value ratio is 65%. That’s the bottom-end number. They’re suggesting that banks tighten it and make that higher. They are also suggesting that banks re-evaluate their loan-to-value ratios on a consistent basis and tighten or loosen them based on individual markets. What does that mean? If your in a market where they feel theirs greater risk to a borrower, they will make loan-to-value ratios higher thus forcing buyers to take on less debt. This is in response to rapid house price appreciation in the Greater Golden Horsehoe and Greater Vancouver area. They are asking banks to tighten borrowing in markets where rapid fluctations up or down are occuring while not applying new rules across the board which could negatively impact other markets that may not necesarily need tighter ratios.
OFFSI wants to change the methods used for appraisal. Currently, appraisals go out and they are used as sort of the be-all, end-all for pricing. Under these new rules, appraisals would only be one part of the equation. Other risk factors would also be taken into consideration that could negatively impact appraised values, which would make it more difficult to qualify.
Any type of co-lending arrangements is going to be banned. This will prevent borrowers from skating around current rules.
They additionally want to slap on new rules that will add requirements with respect to income verification. They want to detect and prevent any types of fraud. Anyone relying on money from outside of Canada, they want more documentation — they want to know the sources, and they’re going to look at this very cautiously. This will make it more difficult for people that depend on money from overseas or generate income in foreign countries to qualify.
Their concern is, again, not letting people borrow themselves to the point where — if all hell broke loose at some point in the economy or the housing market — people can’t keep up with their payments.
They don’t want delinquencies or foreclosures. The economy is doing very well. The housing market has been doing very well. Minus the unnessary fear brought on by our provincial government, everything is very stable and growing. These are rules, again, that aren’t being implemented because there’s a problem.
If these proposed changes become official, it means that borrowers are going to be able to afford less. Those at the entry levels of the market will likely be priced out of the market. If you’ve been on the fence with regards to buying a home, now is the time to act.
Get ahead of the new rules — 20% on a budget is a lot of money. Take advantage of historically low interest rates and a more stable, balanced market right now. Your ability to borrow and amount you can borrow may be significantly reduced if these proposals take effect. OFFSI will be annoucing their final decision towards the end of October and have stated that they will take effect 2-3 months from now.
