Risks of high real estate prices and household debt will be addressed by the new OFSI residential mortgage lending guideline updates.
Some of the risks that are part of partaking in the mortgage market will become significantly lower when tighter mortgage lending rules are implemented with the oncoming stricter regulations. The updates will be finalized by the end of this month, said the federal financial regulator.
The new updates will come in effect 2 to 3 months after the final changes to the residential mortgage lending guidelines or B-20 of the Office of the Superintendent of Financial Institutions (OSFI). This was shared in a speech at Economic Club of Canada in Toronto by OSFI head Jeremy Budin.
The superintendent shared that the majority of changes will be quite similar to what was proposed in July, which includes a stress test for uninsured mortgages and prohibitions on co-lending arrangements that aim or seem to circumvent regulator requirements.
Budin says that they are doing this because they plan to act before lending risks become actual problems.
New Mortgage Stress Test
If implemented, the stress test will mean that homeowners will have to prove that they have the means or capability to continue making payments should interest rates increase. The stress test include those who were not required mortgage insurance, to begin with, and those who have a downpayment of 20% or more.
Rudin’s statements came after the Bank of Canada hiked up their interest rates twice this summer amidst unexpectedly strong economic numbers. He told reporters that the upcoming changes are to help provide support to the lending system as nobody can predict what will happen to house prices in the future.
Crackdown on Co-Lending
Budin said that the OSFI’s crackdown on bundled or co-lending mortgages (those mortgages wherein unregulated providers team up with federally regulated lenders to finance a property) is geared at making sure that financial institutions stick to rules that specify how much they can lend.
He added that the system needs to attain more integrity but that he also acknowledges that the changes to rules may push those thinking of buying a home to use riskier financing options, for instance, shadow banking. He further said that they recognize the fact that some lending activities might move outside the federal sphere but that does not stop them from acting on their responsibilities and mandate.
The more limiting lending rules by the banking regulator came into fruition after Ontario government chose to implement some changes in April in an effort to cool down the housing market. They’ve implemented a foreign buyers tax similar to what was implemented in Vancouver for the same purpose.
Note that the latest figures from the Real Estate Board of Greater Vancouver show that home sales in September of this year is higher than that of last year and that the home price index is up by 10.9% compared to the same period a year ago.