Changes to mortgage rules means that some homebuyers may find it harder to qualify

The Office of the Superintendent of Financial Institutions (OFSI) sent ripples through the industry March 19th, releasing “draft recommendations” for all federally regulated banks to follow.

We have now learned that the OSFI intends on getting these guidelines finalized for the end of June or early July, with implementation potentially immediate, but most likely within a month or two of the official announcement. Bank CEO’s have been informed of these time frames and are beginning to prepare for what could be a large shift in the way the big banks underwrite mortgages. Here are the highlights from the guidelines (available at

* Home Equity Line of Credit mortgages reduced from 80-per-cent financing to 65-per-cent financing.

* Lines of credit to be either amortized, or amortized after a specified period of time (no more never-never plans).

* More stringent income requirements for self-employed borrowers.

* All mortgages to be reviewed upon renewal (currently as long as payments are made, it is unlikely for a bank not to offer a renewal to a client).

* Funds from cashback mortgages are not allowed as a source of down payment (currently only a handful of lenders allow this, but it does mean that “zero down” mortgages are technically available, but with some restrictions.)

* Use of the five-year posted “benchmark” to qualify uninsured terms of one to four years and all variable terms (currently most lenders use a three-year posted or a lower rate to qualify uninsured mortgage.)

* More limits on underwriting exceptions (many recent applications don’t fit the ever shrinking “boxes” with the banks, which means fewer common-sense deals will get approved.)

* Home insurance to be included in debt-servicing ratios (it is currently not included.)

* More public disclosure of statistics pertaining to institutions’ mortgage practices.

* More accountability from management to ensure lenders are adhering to their underwriting guidelines.

Since announcing the proposed guidelines, the OSFI has reviewed comments from the industry and it is changing its opinion on a few items. First, it is becoming more likely that 65-per-cent financing on lines of credit is a done deal, although officials are probably scrapping the idea of a forced amortization on these credit lines. However, the most important comments from the OSFI’s review of the feedback has been that they are likely to withdrawal the requirement to re-qualify at renewal, which has given many in the industry a sigh of relief.

Although many of these above guidelines sound reasonable, having all of these changes come into effect at the same time could have a negative impact on housing markets short term. Potential purchasers may find it more difficult to obtain financing, and investors may find it harder to leverage existing assets to acquire additional properties.

Many in the industry feel that these changes are the government’s way of slowing down accumulation of secured debt and the housing market without raising interest rates.

The Bank of Canada announced June 5 no change in the prime rate, and the consensus is no further changes until early 2013. Many fingers on this decision pointed to ongoing concerns with the European (and therefore worldwide) markets, as well as a relatively strong Canadian dollar and inflation levels at comfortable levels. Until the Euro is more stable, money will continue flooding from European markets to North American markets, keeping interest rates low for borrowers.

For borrowers, this presents a double-edged sword. No longer should they be worrying about getting the best rate on their mortgage (many lenders are currently offering 3.09 per cent on five-year fixed rates), but should be more concerned about getting the money at all. If you are planning on making a purchase this year, the window (especially for investors) may be closing soon.

What is interesting is that these rules are going to be affecting all federally regulated institutions, so we may find that credit unions may be able to offer niche products (like lines of credit over 65 per cent) that major banks won’t be able to offer.

Credit unions will often follow federal guidelines, but may feel that their risk to lend to high-quality clients may not be as severe as the OSFI feels and continue operating on their current guidelines. It might be time to develop a stronger relationship with your credit union again.

Source: Kyle Green, Mortgage Alliance Meridian Mortgage Services Inc.

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