More stringent mortgage qualifications are on the way. On Tuesday, the Office of the Superintendent of Financial Institutions in Canada released draft recommendations that would impact Canada’s banks and other federally regulated lenders.
The 18 page document contained a slew of information, the majority of which make complete sense. However, there’s still great cause for concern in the financial sphere. According to this document, the OSFI is proposing a swift implementation that could shake the system off its foundations. One reputable mortgage source described the OSFI’s recommendations as a “policy-initiated free-fall”.
While we encourage home hunters to review the entire document (available via this link), here’s what best rate mortgage hunters need to know.
Changes for Borrowers
Hunting for a best rate mortgage could become a lot harder, thanks to proposed policy changes. The Office of the Superintendent of Financial Institutions is advocating that “cash back should not be considered part of the down payment”. This would essentially eliminate 100% financing using a 5% cash back mortgage.
The OSFI has also proposed that lenders use the 5-year posted rated for qualifying uninsured mortgages on 1 to 4-year fixed rate terms. Currently, lenders are required to use the 3-year rate. This would make it harder for best rate mortgage customers with 20% or more equity to qualify for some variable and shorter term mortgage products.
It has also been recommended that lenders present more conservative debt ratio calculations and that home insurance be reflected in total debt service calculations. The proposed regulations also focus on the underwriting practices of non-bank lenders. Currently, these lenders are non regulated by the OSFI. However, according to the new recommendations, these providers will be required to adopt many OSFI guidelines if they plan to sell mortgage products to banks – which many already do.
The Loan-to-Value Ratio
One of the new regulations proposed by the OSFI recommends that the “loan-to-value ratio should be recalculated at renewal” to reflect the updated appraised value. However, this could open up an extremely problematic can of worms, especially if housing prices drop. If the market were to tank, leaving borrowers underwater equity-wise, what’s to stop the banks from requiring more people to pay down their mortgage renewals in order to keep the loan-to-value ratio consistent with normal standards? If the number of borrowers in good-standing but with negative equity increases, a negative string of reactions could cause prices to drop further, putting even more borrowers in a sticky situation.
What About Stated Income Mortgages?
A lot of speculation has been swirling around stated income mortgage products. A popular option for self-employed Canadians, stated income products help entrepreneurs secure financing in cases where they are unable to declare income in the traditional manner. According to the OSFI, stated income products require an “undue reliance on collateral” which can be “traumatic for the borrower” and “costly to the lender” if a default were to occur. As such, the OSFI has recommended that banks ask for “relevant income tax information” from all self-employed borrowers (i.e. a T1 accompanied by a Notice of Assessment or a T4 statement).
While it’s already common for lenders to request a Notice of Assessment, this is normally just to confirm that there are no taxes owing. Now, lenders will be required to review the income on these statements. At the end of the day, entrepreneurs who are looking for a true best rate stated income mortgage will likely be forced to resort to non-prime lenders, which would result in higher interest rates.
While there’s no denying that the financing industry requires a shake up, implementing too many rules at one time could create more problems than solutions. This is especially true if other factors, like higher interest rates or increased unemployment, occur at the same time. Stay tuned to Mortgage Talk Canada for more information on best rate mortgage products and the changing lending landscape.