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Will Mortgage Rules Change in 2024?

The Canadian banking regulator (OSFI) has proposed changes that may affect your mortgage approval.

Here's what you need to know.

Mar 27, 2024

Updated from January 24, 2023

Stress Test Rules

More 'home' squeeze, or less?

The Canadian banking regulator, OSFI (Office of the Superintendent of Financial Institutions), exists to protect our banking system, which is one of the most (if not the most) secure in the world.

Every year, it eyeballs rule changes to adjust for current economic conditions, ensuring banks' continued profitability (which helps to keep your money safe).

These changes often mean home buyers and owners are affected (often negatively) when they want to get approved for a mortgage.

Yet, OSFI is also facing pressure to ease some approval rules to help Canadians cope with higher rates and lofty home prices.

Here's what's going on with mortgage-rule changes this year.

Mortgage Stress Test

OSFI dictates that banks must use the federal mortgage stress-test rate when approving most mortgage applications, such as for buying a home, refinancing, or an uninsured mortgage switch at renewal.

Currently, the mortgage stress-test rate is a minimum of 5.25%, or 2.0% above your contract rate, whichever is higher. Read more here.

What changes are proposed for 2024?

OSFI Proposal?
OSFI proposed another regulation for uninsured mortgages to protect the big banks from overleveraged clients should mortgage rates decline. It wants to add another qualifying ratio (loan-to-income, LTI), which would reduce the mortgage amount approved based on the borrower's yearly income.

OSFI Proposal, Confirmed.
The above LTI changes are now a done deal. OSFI announced that in Q1 of 2025, banks will have a cap placed on the number of new uninsured mortgages in their portfolio that are more than 4.5 times a borrower's annual gross income (the cap will differ for each lender).

This new rule could impact first-time home buyers the most, shrinking how much home they can buy based on their income (in addition to the TDS ratios already in place) when getting a mortgage approval through a traditional lender.

As rates fall (when and if they do), this regulation has the capacity to reduce single-property homeowners in Canada and favour higher-income earners and property investors, especially in higher-priced markets such as Vancouver and Toronto. Renewals and refinance aren't included in the lender LTI cap.

Read more here.

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How often are changes proposed?

OSFI reviews mortgage rules at least once per year (usually in December), and proposals to address current issues and provide forward guidance are rolled out throughout the year. Once it consults with the industry, successful proposals are formalized, which take weeks to months to become official (depending on how easy it is for lenders to implement the changes).

Outside pressure?

OSFI's rules aren't always popular with all players in the mortgage industry. This 'resistance' can lead some experts (or politicians) to think that OSFI may implement or reverse changes based on the feedback (it rarely does).

Will OSFI bend to pressure this year?

A recent competition watchdog report urges OSFI to remove the stress test for uninsured renewal switches (insured mortgages already get a pass).

You don't need to re-qualify with the stress test to stay with your lender, and the stifling lack of competition for a renewal rate is being called out (again). Read more here.

What mortgage rules changed in 2023?

OSFI made no changes to the stress test in 2023. However, it did:

  • Require lenders to hold more capital due to amortizing fixed-payment variable-rate mortgage products.
  • October 2023 – Highlight a rule buried in the fine print that lenders can drop the stress-test requirement for eligible insured mortgage renewals.
  • November 2023 – Limit the borrowing room on re-advanceable home equity lines of credit to a maximum of 65% loan-to-value rather than the 80% LTV previously allowed.

It mulled other changes that didn't go through, such as:

  • Raise debt-service ratios further (used to qualify mortgage applications) — many lenders have tightened these limits on their own
  • Reduce or eliminate case-by-case lender exceptions to the stress-test regulations (based on application strength)
  • Changes to the stress test itself (no changes made)

Fact: In 2021, the mortgage stress test minimum was increased to 5.25% (or your contract rate plus 2.0%, whichever is higher) to improve the margin of 'payment safety.' At the time, rates were at historical lows.

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 Eisner, True North CEO, 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 jobs and situations. If someone is nervous about their income, they typically don't buy a home until they feel more secure.

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

Listen to Dan Eisner, True North Founder and CEO, discuss OSFI's mortgage stress test with host Ben O'Hara-Bryne on the January 13, 2023 podcast, A Little More Conversation.

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