Canadian banking regulators are proposing stricter lending rules that will make it even harder for borrowers to get mortgages. As mortgage borrowing costs skyrocketed, household budgets were disrupted and risks to the banking system increased.
The three proposals announced Thursday by the Office of Financial Institutions Supervision (OSFI) would tighten underwriting rules for federally regulated banks that already have the toughest standards among lenders.
Regulators are considering limiting the percentage of highly leveraged borrowers banks can include in their mortgage portfolios, tightening debt service metrics and tightening mortgage stress tests for riskier loans. The new rules will make it harder for borrowers to get mortgages.
However, the current situation has already made it difficult for many lenders, with loan interest rates more than doubling in a year, which has led to a significant drop in borrowing as many Canadians have lost their mortgage eligibility. increase.
“This is only gradually impacting people’s ability to borrow,” said Mike Rizvanovic, a financial services analyst at investment bank KBW. had [in the market], it was actually all done via COVID. ”
The real estate industry has called on OSFI to ease stress tests on mortgages. This test requires borrowers to prove that they can make monthly payments at an interest rate that is at least 2 percent higher than the actual mortgage rate.
But beyond tinkering with more flexibility in stress testing, the plans the OSFI laid out on Thursday would push many prospective buyers out of the market, pushing mortgage holders’ monthly costs down. When it increases, it puts more pressure on lending.
The OSFI proposal is open for comments until April 14th. The regulator has not disclosed how long it will take to review comments or issue new rules.
In a statement of its proposal, OSFI praised mortgage stress testing to help borrowers cope with higher borrowing costs. However, “mortgage risk, particularly related to debt service capacity, has increased significantly since the outbreak of the pandemic,” it said.
OSFI discourages banks from lending to borrowers with large debts, also known as the loan-to-income threshold, defined as borrowers with mortgages greater than 4.5 times their annual income. I’m proposing. OSFI wants to limit these borrowers to his 25% of the lender’s new loans each quarter. As part of that, OSFI is looking at a consistent definition of income, which is difficult given the range of situations faced by households, such as loss of income while on parental leave.
The second proposal could strengthen the criteria for assessing a borrower’s ability to pay mortgages and all other expenses. This is also known as the Debt Service Index. Borrowers who are currently required to have mortgage insurance must meet specific requirements stating that a portion of their monthly household income can cover all housing costs, credit cards, lines of credit, and other loans. . (A borrower needs mortgage insurance if she makes a down payment of less than 20% of the purchase price of the property.)
OSFI listed using the same debt repayment rules for borrowers who do not require insurance, i.e., those who pay a down payment of at least one-fifth of the purchase price of the property. This gives lenders less discretion to deal with uninsured borrowers and tightens the rules for borrowers.
A third proposal considers changing the mortgage stress test to more closely correspond to the risk level of the loan.
The mortgage stress test was introduced during the real estate boom in Toronto and Vancouver in 2016-2017. The real estate industry has criticized stress tests during a boom period for reducing the amount customers can borrow.
If some of the OSFI proposals are adopted this year, what will they do when households who took out large loans when interest rates were near zero in the early real estate boom of the pandemic are now in debt? It is not clear if this will be achieved.
“What’s the problem they’re trying to address here? And if they’ve addressed the problem, it’s only for new homebuyers.
For each proposal, OSFI asks a series of questions to solicit comments on potential joint impacts of all three plans.
Mortgage experts say tighter bank regulation will encourage more borrowers to take out subprime loans that aren’t regulated by OSFI. Borrowers who don’t qualify for a large enough loan from banks are already flocking to private lenders.
“What does this mean for borrowers?” said Laura Martin, chief operating officer of mortgage brokerage firm Matrix Mortgage Global. .
Most of the big banks did not respond to requests for comment. Royal Bank of Canada said it will participate in the consultation process and said it has prudent underwriting policies and practices.