Market Hangs in the Balance Amid Proposed Mortgage Rules
Proposed mortgage rules and what are the implications
Although the Canadian real estate market is starting to pick up, there are growing concerns the new OSFI proposals might make qualifying for a mortgage more difficult. These new proposals by the Office of the Superintendent of Financial Institutions might negatively impact the Canadian real estate market. These proposals would make it more difficult for borrowers to qualify for a mortgage.
OSFI is the federal banking regulator in Canada, and in January, they released their proposals for the first phase of the B-20 mortgage underwriting rules review. The proposed mortgage rules:
• Creating a loan-to-income (LTI) threshold, preventing borrowers from qualifying for residential properties that are over 4.5 times their annual salary,
• Introducing debt servicing rules for borrowers who are uninsured and;
• Making the affordability tests in the stress tests more stringent.
The aim of these proposals is to reduce the risks associated with taking out loans, which have been increasing year after year. However, some people in the mortgage industry, like Aldo Mormile, a mortgage agent from Real Mortgage Associates, are worried about the potential negative impact these proposals could have on Canada’s real estate market. According to Mormile, qualifying is already challenging enough. It’s going to become even harder with these new mortgage rules. Furthermore, such rules will continue to affect the new home buyers and those with marginal incomes the most. “It is a case where the OSFI prefers to turn a blind eye to borrowers who are already greatly affected by existing qualification rules. CMBA does a superlative job in protecting both the industry and the average home buyer ” says Mr. Mormile.
Other Experts in the industry are worried about the record of consumer debt and higher interest rates, which are major concerns affecting Canada’s financial sector. However, the Canadian Mortgage Brokers Association (CMBA) of Ontario says that the current proposals might not address these concerns best. The CMBA is working in providing feedback to OSFI.
Sadiq Boodoo, the CMBA Ontario President, said that “pre-approvals would essentially go out the door. He further stated that it will be difficult for someone to fit into this ” tiny box
In addition to the current regulations, there is a rule called the mortgage stress test. To qualify for a mortgage, the borrower needs to pass a stress test to ensure they can make payments even if borrowing rates escalate. Borrowers need to show they can pay their mortgage at an interest of 5.25%, or two percentage points higher than their actual rate, whichever is higher.
Stakeholders have until April 14 to provide feedback to OSFI on the proposed changes. While the goal is to reduce the amount of mortgage debt Canadians take out, there are concerns that these changes could have unintended consequences on the Canadian real estate market, especially for first-time homebuyers who already face significant barriers to homeownership.
The CMBA is suggesting ways to help first-time home buyers get into the market with ease. They propose allowing amortization of 40 years for their first home purchase, meaning they will have more time to repay the mortgage. If first-time home buyers decide to purchase another house or refinance, they would have the same 25 or 30-year terms as everyone else. This makes first-time home-buying more affordable for Canadians.