Canadian Mortgages

News on Canadian mortgage rates, mortgage brokers in Canada, banks, and fresh new mortgages.

Prime & 5yr Bond Rates

Key Interest Rates

Qualifying Rate 4.99%
Prime Rate 3.00%
Next BOC Mtg. Jun 4

CMT In the News...

Media/Internet Coverage


Popular Posts

> I.D.E.A.S. for Choosing Fixed or Variable
> The Fixed / Variable Mortgage Conundrum
> Smith Manouevre
> The Incredibly Shrinking Variable Discount
> Neglect Not Thy Cost of Borrowing
> 5- or 10-year Mortgage?
> Beacon Score Basics
> Smith Manoeuvre Maintenance
> Getting the Best Mortgage Rate

« Mortgage Career of the Week | Main | Flaherty Tells Banks: Do Your Jobs »

March 20, 2012

On The Way: More Stringent Mortgage Qualifications

OSFIOSFI, Canada’s banking regulator, is leaning on banks and other federally regulated lenders to clamp down on underwriting practices. It released these draft recommendations yesterday.

After reading through 18 pages of changes in detail, our immediate reaction was frankly, concern.

That's not because the guidelines are greatly imprudent. Some are unnecessarily rigid, but most are sound policy.

It’s because OSFI risks tightening too much, too fast.

If the government also decrees new insured mortgage regulations (like these), and/or rates rise significantly, and/or unemployment unexpectedly spikes, it could form the proverbial perfect storm that blows over housing valuations.

It's one thing to induce a measured housing correction (which is probably needed in some regions), but a policy-initiated free-fall is another matter.

At this stage, OSFI’s proposal is not final. It is currently open for public comment, but if this draft guidance morphs into a firm set of guidelines, there could be broad implications for borrowers.

Here’s a rundown of the changes being discussed (our comments in italics):


For All Borrowers:

Restrictions-on-MortgagesThe lending tap may be tightened for a variety of mortgagors. Among other things, OSFI is advocating:

  • That “cash back should not be considered part of the down payment”
    (This seems reasonable to most people. Ninety-five per cent loan-to-value is the maximum for standard purchase financing. If lenders apply OSFI’s guidelines literally, we may say goodbye to 100% financing using 5% cash-back mortgages. These products are currently offered by Scotiabank, Laurentian Bank, National Bank, and others.)
  • Use of the benchmark 5-year posted rate (“at a minimum”) for qualifying uninsured mortgages with variable or 1- to 4-year fixed terms
    (Many lenders currently use 3-year rates to qualify uninsured mortgages. This could make it harder for those with 20% or more equity to qualify for variables and shorter-term mortgages.)
  • That “the loan-to-value ratio should be re-calculated at renewal” based on the updated appraised value
    (OSFI tells us, "This is a new guideline." To us, it raises the question of what lenders will do if housing prices drop and borrowers are underwater equity-wise. If the number of good-standing borrowers with negative equity increases, will banks start requiring more people to pay down their mortgages at renewal (to bring LTV within normal standards)? Doing so could theoretically trigger a negative feedback loop. In other words, some people would have to sell if they couldn’t come up with the money. That could push prices down further and put more borrowers underwater. OSFI says that this new guideline "does not change (the) dynamic" lenders currently face if prices fall, and that lenders "do not have to conduct the same level of due diligence at renewal" if they have an established relationship with a borrower. But, that kind of skirts the real issue, which is: What's the point of "re-calculating" LTV and re-appraising a property if lenders aren't expected to enforce standard LTV maximums?)
  • That home insurance be reflected in total debt service (TDS) calculations. (It currently is not.)
  • More conservative debt ratio calculations
  • More scrutiny (by banks) of non-bank lenders' underwriting practices. This applies in cases where a non-bank lender is selling mortgages to a bank.
    (As a result, even though most non-bank lenders are not OSFI regulated, they may be forced to adopt many OSFI guidelines if they’re selling mortgages to a bank—which many are.)
  • “Limits on any (underwriting) exceptions”
    (Reasonable exceptions are granted by lenders all the time because lending is not a black and white science. It would be needlessly detrimental to well-qualified borrowers if this guideline were to make underwriters more afraid to apply common sense exceptions.)
  • In addition to the above, OSFI says it wants greater public disclosure of statistics pertaining to institutions' mortgage practices. (Data junkies [like us] will love this one.) [More from the Post]
  • More reporting and accountability from management as to a lender’s adherence to prudent underwriting guidelines.
    (No argument here.)

HELOC-Home-ATMFor HELOC Borrowers:

  • OSFI proposes three important new guidelines:

    • A) HELOC limits should generally be set to a maximum of 65% loan-to-value.
      (Currently, HELOCs are approved for up to 80% LTV. If we’re to take this literally, it portends a big slowdown in HELOCs. HELOCs have been major growth areas for some banks, especially RBC and BMO.)
    • B) Banks would need to impose either:
      • “A clearly-defined period (e.g., 5 years), after which the outstanding balance of the HELOC converts to a fixed-term with a reasonable amortization period;
        (This would undoubtedly encourage some HELOC borrowers to switch lenders after five years.)


      • "A set percentage of the outstanding balance of the HELOC (be made) due each month that equates to a reasonable amortization period."
    • C)  “At a minimum, HELOCs should have an amortization period that is no longer than the amortization period that would be available for a similarly qualified residential mortgage.”
      (HELOC borrowers on the “never never” debt repayment plan won’t like these last two points, as they could potentially make interest-only payments history at some lenders.)

Self-employed-mortgagesFor Entrepreneurs:

Numerous lenders offer stated income mortgages. They’re designed to help Canada’s 2.67 million self-employed obtain financing in cases where legitimate tax planning prevents them from declaring income in a traditional manner.

To mitigate risk on "business-for-self" mortgages, lenders rely heavily on the borrower’s equity, credit score, and repayment history.

OSFI is not overly fond of this business model.

It says “Undue reliance on collateral” can be “traumatic for the borrower” and “costly to the lender” in default situations. Moreover, credit scores can be fallible if relied on too heavily.

OSFI also says it’s concerned about application fraud with stated income applicants.

As a result, it recommends that banks ask for “relevant income tax information” from self-employed borrowers. That means the equivalent of a T4 or T1 General accompanied by a Notice of Assessment (NOA).  

Note:  It’s already common for lenders to ask for NOAs with non-income qualified applications. But, they often do so simply to confirm that no taxes are owing. 

In this new regime, lenders will increasingly be looking at the income on those documents as well. More and more, if borrowers want a true stated income or equity mortgage, they may have to resort to non-prime lenders and pay higher interest rates.


Mortgage-policiesIt’s worth reminding everyone that the above are draft guidelines, not regulations. In addition, once implemented, regulations technically have more teeth than "guidelines."

That said, an OSFI spokesperson tells CMT, banks can expect OSFI intervention if they ignore important guidelines.

As well, Maura Drew-Lytle, a spokesperson from the Canadian Bankers Association, tells us: “Federally regulated financial institutions will be required to follow the final guidelines, whatever they may be.”

So, this all comes back to our first point. In aggregate, these rules (they’re not officially rules but they’re pretty close) are not a small pill for the market to swallow.

Hopefully there are regulators out there somewhere, asking themselves:

  • How many new lending "guidelines" can the market bear before it breaks?
  • Why have we allowed so few exceptions for responsible low-risk borrowers, for whom flexible lending policy provides genuine economic benefits?
  • Does the benefit of more restrictive lending outweigh the economic cost and housing repercussions? 

It's not unlike the speed limit analogy. Cutting highway speeds from 100 km/h to 60 km/h would save thousands of lives, but at a cost. Downshifting the mortgage market too quickly, has its own set of costs. 

Drew-Lytle notes that: “One of the causes of the global financial crisis was the questionable mortgage underwriting practices of lenders in some countries. This clearly was not the case in Canada.”

“Canadian bank practices permitted them to avoid the self-inflicted financial difficulties of banks elsewhere," she adds. "The sound management and prudent mortgage lending practices of Canadian banks meant that the government did not need to rescue them through bailouts.”

Mortgages-marketDrew-Lytle states that Canada's strong lending performance is partly reflected in its arrears rate of 0.38%, which is among the lowest in the world.

“This number has been stable for more than two decades, in times of high and low unemployment, high and low interest rates and a strong or weak Canadian dollar. It is well below levels in the U.S. and the UK," she said.

Of course, defaults will rise as home prices correct (as they typically do). But that is natural in any downward slope of the housing cycle.

Everyone is also well aware that the market is riskier today. Down payments are lower, prices are higher, and so are debt levels. Indeed, Canada’s housing market hasn’t been put under severe stress in many years (2008 was a mere blip on the price chart). As a result, one might expect defaults to double, if not triple, on a national basis in response to a serious downturn. 

In any event, we'd close by noting that most of these measures are good common sense. In fact, many of OSFI's recommendations are already employed by scores of lenders.

On the other hand, there’s a real risk that excessive rule-making will create more problems for housing than it solves. That's especially true if it's combined with additional housing "speedbrakes" (e.g., more amortization or down payment regulations, interest rate hikes, or rising unemployment). Regulators may find in hindsight that it's sometimes better to take medicine from a spoon than a ladle.

Sidebar: Non-federally regulated lenders are not directly bound by these rules, which might give some of them an edge in offering more flexibility to qualified borrowers. The exception, per above, are non-bank lenders who must sell to banks. Those non-banks may be held to similar standards by their bank partners.

Rob McLister, CMT

Thank you for your comments. All posts are moderated. Please expect a short delay before they appear.


My Photo
Melanie & Rob McLister

Mortgage Question?


Click to Search

Subscribe (Free)

Enter Your Email Here

Canadian Mortgage Trends RSS

Mortgage Links

Canadian Mortgage Trends (CMT) delivers the latest mortgage news in Canada for homeowners, online mortgage brokers, and real estate professionals. Legal Information: Consult a qualified mortgage advisor before making any mortgage decision based on information you read here. Similarly, if you see a financial or tax strategy discussed here, always consult a licensed and qualified investment or tax advisor to ensure the strategy is right for you. Mortgages, investment, and tax strategies mentioned on this website are not appropriate for everyone. In many cases, they may not be feasible at all and/or entail serious risks. While reasonable effort is made to ensure the accuracy of information and data contained herein, accuracy, facts, completeness, and suitability can not be guaranteed. Past performance is not a good predictor of future performance. Results, rates, strategies, and terms are not guaranteed and CMT and its affiliates assume no liability for any losses that may occur from your reliance on such information. The information on this site reflects purely our opinions, and not necessarily the opinions of any other party. Readers are welcome and encouraged to leave comments. Please note, however, that CMT endeavours to keep all forums factual and civil for the benefit of readers. Comments that are off-topic, quarrelsome, accusatory without evidence, factually incorrect by objective standards, racially insensitive, profane, slanderous, misleading, unreasonably repetitive, made with false email addresses, made under multiple pseudonyms or different names from the same IP address, or otherwise rude or deemed inappropriate by CMT, may be removed without notice. To reduce incidences of SPAM, linking to or promoting individual brokers is not permitted. In addition, multiple comments submitted within a short timeframe may be considered SPAM. To keep comments on point, all questions regarding CMT policies should be sent to the below email address and not posted in forums. CMT is a news site, and not affiliated with most of the people or companies mentioned. Company logos and trade-marks displayed herein are the property of their respective owners, are displayed for commentary purposes only, are not intended to be used in a competitive manner with said owner, and should not imply an association or affiliation between CMT and said trade-mark owner or its products or services. Information herein is not intended to be, nor does it constitute, mortgage advice, investment advice, tax advise, financial advice, recommendations, or solicitations to buy or sell securities. CMT personnel and related parties may have an interest in the mortgages, services, companies, products, or securities mentioned on this site. Please contact us if you require clarifications of the above. CMT's website is owned and operated by McLister Media Inc. CMT's trademark and copyrights are used by McLister Media Inc. under license. For questions about the news you see here, mortgages, copyright, or republishing CMT content, please contact us at (800) 280-2460 or [email protected] Thank you for reading CMT. ISSN# 1927-8772. Copyright 2014. All rights reserved.