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OSFI has proposed tighter mortgage rules.

With rates higher, the Canadian banking regulator is eyeing more mortgage muzzling.

Tighter lending rules would make qualifying for a mortgage even harder, turning more potential home buyers into renters. Here's what you need to know.

Jan. 24, 2023
Stress Test

The dream of ... renting a home?

OSFI (Office of the Superintendent of Financial Institutions), our governing body for banking regulations, has proposed some changes to qualifying limits to reduce mortgage lending risks.

And while they may be intended to protect our national banking system further, they'll likely also push out more first-time buyers who dream of owning a home, and even next-home buyers.

Those potential buyers who won't qualify with stricter lender requirements will have to stay in their parent's basements, or in their current mortgages (if they can't qualify to switch) — or have to rent.

Who will own the home they're renting? (Not them.)

"The required mortgage stress test is already pushing marginal buyers into renting, even though they're likely paying about the same amount as for mortgage payments. We’ve seen the number of homes owned by the people who live in them fall, and the number owned by investors increase. That won't get better if qualifying is made that much harder for Canadians."

– Dan Eisner, Founder and CEO of True North Mortgage, discussing the new OSFI proposals on Ben O'Hara-Bryne's podcast (Jan. 13, 2023)

More Canadians renting instead of owning means increased rent-competition for Canada's limited housing supply. Higher demand often leads to higher rents. A recent Foreign Home Buyers Ban will also see more people immigrating who could have bought a home now only being allowed to rent (until they can submit years of tax returns). A hot rental market makes homes for sale more attractive to wealthier real estate investors who want to capitalize on the higher revenue.

OSFI's proposed changes that could affect mortgage approvals:

  • Raise debt-service ratios (used to qualify mortgage applications)
  • Add further loan-to-income restrictions (for example, if you make $100K, you'll only qualify for a home price of $400K or less)
  • Reduce or eliminate case-by-case lender exceptions to the stress-test regulations (based on application strength)
  • Changes to the stress test itself (despite OSFI deciding to make no changes in December 2022)

Other lender-side limits are suggested, such as restricting the flow or volume of new mortgages approved for higher-indebted households.

The stress test has prepared home buyers for today's higher rates.

The federally-required mortgage stress test was introduced when mortgage rates were low to protect home buyers if rates went higher — so that they could still afford their payments and not default on their mortgages (which affects lender stability, as well).

The law wasn't well-received at the time, as Canadian home prices were considered lofty, and first-time buyers were trying to find an affordable way into the housing market. Of course, now that rates (and most home prices) are higher, both OSFI and lenders are very pleased with the results, as mortgage delinquencies remain at an all-time low.

Fact: The Mortgage Stress Test was increased to 5.25% in 2021 (or your contract rate plus 2.0%, whichever is higher) to improve the margin of 'payment safety' during a time of sustained lower rates. Now, rates are higher, which means your qualifying rate is, too.

OSFI sentiment assumes that home buyers seek to max out their affordability.

"OSFI seems to have an assumption that Canadians will buy as 'much home' as possible," Dan observes. "But we haven't really seen that with our clients." From what he sees, Canadians are very diligent about not taking on too much mortgage.

He explains: "Our True North and THINK Financial clients often come to us with a very good idea of the size of mortgage and payments they can handle. Even if we provide them with higher numbers based on their details, they'll often say, 'this is what I feel I can afford.'"

Canadians, for the most part, aren't going to buy a house unless they feel secure in their own jobs and situations. If someone is nervous about their income, that person typically doesn't buy a house until they feel more secure.

No one wants that mortgage payment stress, and our clients tend to make relatively prudent decisions to avoid it.

So why are these rules being proposed?

Would OSFI's beefed-up lender protection help avoid a massive financial downfall? The current mortgage stress test and qualifying rules are already doing a very adequate job.

At True North, we do wonder why these rules are being imposed at a time when government overreach could push homes into the hands of wealthier Canadians.

Right now, when you apply for a mortgage, you have to qualify using the federally-required mortgage stress test of your contract rate plus 2.0%. Plus, regulated lenders (most big banks and monoline lenders) already use additional income, credit and debt-servicing limits to determine the strength of an application.

If Canadian lenders are fastidious about their own bottom lines, and home buyers are made to prove they can afford higher payments — what will these proposed changes really accomplish?

When could these changes come into effect?

When OSFI seeks feedback for 'proposed' changes, they're usually not far from bringing down the hammer. We'd likely see any finalized requirements that will impact home buyers brought in during the 3rd or 4th quarter of 2023.

Should the stress test be eased for mortgage renewals?

When coming up to renew their terms, Canadian homeowners need options to improve their mortgage load — not restrictions that keep them stuck with their lenders to pay more.

To move their mortgage to another lender, they'll need to requalify. And even though they had already qualified for their mortgage and are diligently paying it down, the current higher stress test prevents some from switching lenders. That keeps homeowners 'stuck' and at the mercy of their existing lender (who can opt to offer an even higher renewal rate).

Industry experts are calling for lower 'renewal' stress-test requirements to more easily allow lender switches and increase homeowner access to the savings options available to them.

Listen to Dan Eisner, TNM CEO, discuss the OSFI proposals with host Ben O'Hara-Bryne on the January 13, 2023 podcast, A Little More Conversation.

The Canadian dream isn't to rent. It's to own.

Owning your home can feel like you've got a place to set roots and take on more responsibility, or raise a family, or start down a financial path that puts you on the road to building more personal wealth. Or somewhere you can actually paint to your heart's content.

Regardless of the qualifying factors involved, we can help you determine your best path to homeownership — including great advice on getting your best-possible rate to save thousands and down payment and credit strategies.

Have questions about your home affordability or the federal stress test?

We're here for you, anywhere in Canada. Our friendly experts are real people who really know mortgages. Give us a shout, today.

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