This year, the Office of the Superintendent of Financial Institutions (OSFI) implemented 3 new mortgage rules that took effect on January 1, 2018. These 3 rules have a significant effect on the financing arrangements between lenders and buyers.
All uninsured mortgage consumers now have to qualify for a mortgage using a minimum interest rate. The minimum interest rate is the greater of the five year benchmark rate given by the Bank of Canada or the lender contractual mortgage rate with an additional 2%.
The biggest impact of this change is on the amount of money which the home owner or buyer will be able to qualify to borrow. Before this change, the home owner or buyer qualified for the mortgage at the interest rate offered by the lender. The actual mortgage will still be paid at this interest rate but a higher calculation will be used to qualify for the mortgage itself.
Refinancing options will still be available up to 80% of the value of the property. You have to pass the same stress test, which is the higher of the Bank of Canada five year benchmark rate or your lender’s contractual mortgage rate plus 2%.
Mortgage lenders (excluding credit unions and private lenders) must establish and adhere to appropriate LTV ratio limits that reflect risk and are updated as housing markets and the economy evolves. This policy is awaiting further input from lenders.
This change means that lenders will have to put internal risk management protocols in place for higher priced markets like Vancouver and Toronto. This is an expansion of a policy that is already in place and many lenders have already been adhering to this practice for the last year.
Mortgage lenders (excluding credit unions and private lenders) will be prohibited from arranging with another lender in any form that avoids or circumvents the institution’s maximum LTV ratio. This includes all other limits in its residential mortgage underwriting policy or any requirements that involve provincial or federal law.
This is called a bundling partnership or a bundling. This means that if a consumer applies for a mortgage with an 80% LTV and the lender only approves 65%, the latter partners with a second lender for the remaining 15% and can make up the 80%. Under the new law, this is no longer allowed by OSFI.
These mortgage laws are designed to protect lenders and buyers and avoid people from defaulting on their loans and going bankrupt. These policies will keep people from over investing and lenders from encouraging predatory lending practices.