The first round of changes to Canada’s mortgage rules were more bark than bite, according to a letter sent to the nation’s banks on Wednesday from the Office of the Superintendent of Financial Institutions. Earlier this year, mortgage experts speculated that new mortgage rules could have a dampening effect on hot real estate markets, as more and more mortgage applications would inevitably be rejected.
Draft guidelines released in March suggested that the OSFI would eliminate 100% financing using a 5 percent cashback mortgage as well as enforce stiffer regulations concerning loan-to-value ration calculations and stated income mortgages. The document also inferred that borrowers would be required to re-qualify each time their mortgage came up for renewal.
However, Wednesday’s announcement tells an entirely different story.
Let the Backpedalling Begin
Change #1 – Mortgage Renewals
The last stipulation concerning mortgage re-qualification was the main focus of Wednesday’s OSFI correspondence. In one of the most significant changes from the original proposals, the Superintendent withdrew the amendment, much to the relief of lenders and mortgage holders across the country.
“To be honest, forcing mortgage holders to re-qualify every time their mortgage came due would have caused many Canadians to lose their homes,” remarked Robb Nelson, President and CEO of FamilyLending.ca. This is because the current method of mortgage renewal tends to focus on a borrower’s payment history rather than rechecking income levels or property value. “In many cases, these elements [income and property values] can deteriorate over time. Changing the rules to revisit this criteria would have caused a lot of problems for many mortgage holders.”
Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals, along with members of the Canadian Bankers Association, expressed their approval of the decision on Wednesday.
Change #2 – HELOCs
Another change from the original proposal focused on home-equity lines of credits. In March, the OSFI suggested that banks would need to amortize HELOCs in order to help control debt. Wednesday’s announcement confirmed that this would not be the case. As a result, HELOCs will continue to revolve (the proposed rules would have required consumers to pay back their loan within a shorter period of time).
Mortgage professionals still have some unanswered questions in regards to new HELOC rules, however. “Currently, consumers can get a mortgage portion in addition to a HELOC line of credit,” explains Nelson. “People tend to use these products for leveraged investments and sometimes interest-only borrowing. Changing the rules will have big tax implications for some people.”
Change #3 – Property Assessments
The final point brought forth in Wednesday’s announcement concerned property assessments. Right now, banks rely almost entirely on automated appraisals rather than human reports because software is cheaper and can turn around results more quickly. According to the OSFI, regulators will be keeping a closer eye on this method in order to better gauge overvaluations.
What to Expect Going Forward
Best rate mortgage seekers shouldn’t hold their breathe when it comes to more lenient lending rules. Some industry watchers are speculating that Wednesday’s announcement is not a sign of things to come. Final guidelines are scheduled to be released around the end of the month.
While changes by the OSFI are designed to help control ballooning debt at home, the new regulations are actually part of a larger, international effort to prevent another housing crisis. The new regulations are intended to help cool the country’s overheated housing market (especially in areas like Toronto and Vancouver) by tightening the rules and reinventing consumer lending.
“Securing a low mortgage rate won’t be as easy as it used to be once these regulations are put in place,” warns Nelson. “If you’re considering buying this summer, now is the perfect time to secure a pre-approval and lock in your rate.”