Getting a Mortgage Just Got a Little Tougher
22 Sep 2016

Getting a Mortgage Just Got a Little Tougher

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Getting a Mortgage Just Got a Little Tougher

 

This week,the Office of the Superintendent of Financial Institutions (OSFI) announced that beginning this fall, November 1st, there will be new guidelines affecting mortgages in Canada.  Mortgage professionals and bankers are cringing at what might be next.  Mortgage changes may only apply to the banks but they ultimately affect all of us – the end consumers.  So what does this latest set of upcoming mortgage changes mean for you?  Here’s my take on what’s to come:

• Under the new guidelines, lenders will have to set aside more capital in certain cases to protect them from potential market blowups.  By having more capital in reserves, banks will be able to better withstand a market downturn and better handle potential losses.

• If a Canadian lender doesn’t follow the guidelines set out by OSFI and the mortgage insurers, it may “reduce the level of consideration of the mortgage insurance the lender is using as a guarantee to mitigate its credit risk”. This means banks are expected to have policies and procedures in place to originate, underwrite and administer their insured mortgages.

What this means is that banks can handle this in a couple different ways.  One would be to increase their mortgage interest rates to offset their new additional costs of compliance.  Or two, to tighten their lending criteria a little more so that they lend out on less risky deals and focus on a tighter lending criteria so that the capital requirements won’t be as large.  So in short, these changes will take effect on November 1st and will mean that obtaining a mortgage may be a little tougher than before or slightly more expensive.  However, don’t expect any large jumps in interest rates, but small, slight increases could be on the nearby horizon.  Does this mean getting a mortgage will be impossible? No, but we will have to jump through just a few more hoops than before to obtain the mortgage we want.

Looking back over the last several mortgage changes that the government introduced over the last several years, we saw insured mortgage amortizations shorten from 40 years to 35 to 30 and finally to 25 years; we have seen refinances of currently owned homes limited to 80% of the home’s value (better known and LTV or Loan-to-Value) from previous 85, 90 or at one point an almost impossible to believe 95% LTV; debt servicing ratios lowered to 39/44% from previously higher numbers (this is the ratio of income to debt you’re allowed to have when obtaining a home); government elimination of insured HELOC’s (Lines of Credit); higher downpayment requirements for Rental purchases; introducing a Benchmark Rate for variable rate mortgages and mortgages with terms of 1-4 years, just to name a few.  These changes have all been introduced to lower risk to the banks and government but have also made it harder to qualify for a mortgage.  Your income now buys less house with a 25-year mortgage vs the previous 40-year mortgages of 2008.  Acquiring a rental property now requires a 20% cash downpayment vs the previous 5% making it harder for average consumers to acquire wealth through rental property purchases.  I am sure the upcoming changes in November will have an impact on us consumers again, but we will have to see what exactly the banks will do to deal with this new upcoming guideline.

For more info on the current changes, read the full articles here and here.

http://www.mortgagebrokernews.ca/business-news/canada-regulator-sets-out-stricter-mortgage-rules-for-banks-213629.aspx

http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2016/09/more-on-osfis-recent-capital-guidance.html

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