While everyone’s talking about the new mortgage changes that went into effect on July 9, the new proposed changes by the Office of the Superintendent of Financial Institutions (OSFI) have gone almost unnoticed by consumers. But, depending on the province you live in and the type of lender you want to use, by the year’s end it could prove to be even more difficult to get a mortgage. So what are the new rules proposed by OSFI? And how are they going to affect you?
Maximum loan-to-value ratio on HELOCs will be reduced from 80% to 65%.
This is one rule that will tickle Mr. Flaherty’s practical bone. The Finance Minister has been concerned for nearly two years now about the rising amount of debt we’re taking on as Canadians; and the “ATM-style” we’re using with our HELOCs. He and the Conservative government have just lowered the total amount allowed to be borrowed on a HELOC from 85% to 80% and now, OSFI is going to lessen it further by a whopping 15%. This rule change will go into effect on all new home equity lines of credit. OSFI has made it very clear that they are not going to touch those that are already on loan.
Qualifying rate to be toughened.
This is one of OSFI’s new rules that confuses people right off the bat. The qualifying rate is the rate at which you, the borrower, must qualify for a home loan; and that rate is going to be higher than the one you’ll actually pay on your mortgage. So if you apply for a 2.25% rate on a 5-year variable mortgage, the lender might need you to qualify at their higher posted 5-year rate of 5.39%. The qualifying rate is put into place so that lenders can make sure that borrowers can afford the loan they’re taking on, even if interest rates go up.
The new OSFI rule is going to make that qualifying rate harder to reach for variable rates and fixed term conventional mortgages that are fewer than five years. Now according to the OSFI, the qualifying rate must be “the greater of the contractual mortgage rate” meaning what the rate in the mortgage documents says, “or the five-year benchmark rate published by the Bank of Canada,” meaning that if the lender’s rate is lower than the BoC’s, the higher rate must be used.
This new rule will have a huge change on borrowers because it will push some of them into a longer term when they can’t afford the shorter one. And if homebuyers can’t, or don’t want to, take on a mortgage of that length, it could leave them out of the market altogether.
No more stated income mortgages.
This new rule is going to likely have the least impact on the housing market because so many lenders have already pulled out of the stated income market. With a stated income mortgage, borrowers once were able to simply tell the lender what they earned in a given year, and lenders would use that number in their loan documentation. This was a practice that helped those with inconsistent income, such as the self-employed and didn’t have paycheque stubs or letters of employment to back up what they said their income was. It was also useful to those that had non-traditional forms of income, such as tips and commissions. Now though, no more of it will be allowed.
Under OSFI’s new rules, all borrowers will have to provide reasonable verification of their income such as a Notice of Assessment when they apply for a mortgage. This one could be difficult and leave many with non-traditional or inconsistent income out of the market, if they’re not careful. Making sure that you claim every cent on your tax forms and keeping diligent track of your earnings (in a written form other than your own,) can also certainly help when verifying your income.
No more “cash back” down payments.
It used to be that you could apply for a mortgage and through “cash back” financing, receive some money back when the loan closed. This allowed borrowers to borrow their down payment; and that practice is coming to an end. All homebuyers will now have to put up at least 5 per cent for their mortgages and, under the federal government’s new mortgage rules, mortgage insurance will need to be taken out and the amortization period on that mortgage will be reduced to 25 years instead of 30. Buyers who still have the 20 per cent down payment remain untouched. Of all of OFSI’s new rules, this is the one that people can agree to the most simply because it makes the most sense.
It’s important for borrowers to remember when looking at OSFI’s new rules that they only apply to banks and other financial institutions that are regulated by the federal government. For consumers, that means that if they still want to be able to get a mortgage “the old way” they may have to seek out the services of credit unions and other lenders that aren’t restricted to the federal government’s new rules. And that alone could be a huge boon to credit unions – and to the customer!
For the full transcript of OSFI’s new rules, you can find it in PDF format here. Unlike the new mortgage rules, which went into effect on July 9, lenders have until the end of the fiscal year to make the switch to the new lending rules. Because lenders have varying end dates on those fiscal years, this means that we could see changes as soon as in the next two months, and all federally regulated lenders will have made the switch between October 31, 2012 and March 31, 2013.
