- January 18, 2018
- Posted by: Umar Zulqarnain
- Category: Real Estate Law
The New Mortgage Rules: Quick and Easy Guide
In October 2017, the Office of the Superintendent of Financial Institutions (OFSI) published Guideline B-20 – the Residential Mortgage Underwriting Practices and Procedures. This document included new mortgage rules that were meant to ensure “federally regulated mortgage lenders remain vigilant in their mortgage underwriting practices.” The rules came into effect on January 1, 2018. You can view an overview of the rules published by OFSI here.
The new law will have a significant impact on the real estate industry overall. How they will impact the average borrower is an elusive question. How they encourage lenders to “remain vigilant” is often misunderstood. A recent study by RE/MAX found that 37% of Canadian’s are not even aware of the new rules. This article will provide background on the OFSI, an overview of the new rules and advice for homeowners, investors and borrowers.
What is the OFSI?
The OFSI or the Office of the Superintendent of Financial Institutions is a Canadian regulatory body that provides guidance and rules for financial institutions and banks. The OSFI supports the development of federal legislation and regulations affecting federally regulated financial institutions (FRFIs). FRFIs include banks, trust companies, loan companies, life insurance companies and other financial institutions. OFSI rules do not apply to provincially regulated credit unions.
What Are the New Mortgage Rules:
1. The new “stress test” for uninsured mortgages sets a new minimum qualifying rate.
Uninsured borrowers must now qualify for a new minimum rate – the greater of the Bank of Canada’s five-year benchmark, or 2% higher than their mortgage rate. This new rule will primarily impact consumers with down payments of 20% or more.
As of January 17, 2018 – the Bank of Canada raised its key lending rate to 1.25%. While the five-year benchmark rate sits at 4.99%, this may rise shortly – especially considering the big six banks raised their five year fixed-rate mortgages by 0.15% in anticipation of the key lending rate hike.
2. Lenders are now required to enhance their loan-to-value (LTV) ratio making it more dynamic and reducing risk.
This means lenders cannot give out mortgages that are too large compared to the value of the home.
3. Certain lending arrangements designed to circumvent LTV limits will face new restrictions.
Federally regulated financial institutions are prohibited from arranging financing in a way that circumvents the institutions LTV ratio or other limits in residential underwriting policy. This primarily impacts financial institutions working with other lenders.
How to React to New Rules
Responding to the new rules requires careful consideration of your particular financial situation. “Finding a lawyer who understands the rules and works closely with your mortgage broker is very important,” says Hannah Aviram, Director of Operations at Treadstone Law. “The rules have not impacted the market as much as people think – we have actually seen an increase in real estate transactions at Treadstone.”
“Finding a lawyer who understands the rules and works closely with your mortgage broker is very important.” – Hannah Aviram – Director of Operations, Treadstone Law
Daniel Johanis, President of A Better Mortgage Broker outlined the importance of a competent mortgage professional, “I think consumers need to be informed. Consumers should be reading and understanding the new mortgage rules. [However] it is more important that they hire a mortgage professional who understands the implications of the rules in detail. Someone who can help them navigate the new rules.”
“…it is more important that [consumers] hire a mortgage professional who understands the implications of the rules in detail. Someone who can help them navigate the new rules.” – Daniel Johanis, President, A Better Mortgage Broker
It is important to note that financial regulators have allowed for measures to ease the transition. This means that transactions that are underway but not yet completed will not be disrupted. This holds for pre-construction agreements also.
OSFI rules also do not apply to credit unions. In the past, credit unions have voluntarily adopted federal standards on mortgage rates. However, voluntary adoption of the rules means credit unions can still make exceptions.
Understanding and navigating these new rules requires hiring the right professionals to support your mortgage transaction. Hiring the right lawyer and mortgage broker can make it easier for you to navigate the new rules and provide the necessary guidance for sound financial planning.