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Wednesday, October 18, 2017

On Tuesday the Office of the Superintendent of Financial Institutions (OSFI), Canada’s top banking regulator, announced changes to rules affecting Canadian mortgages. The new rules are scheduled to be implemented in January 2018 and will require homebuyers to qualify for a mortgage based on a higher mortgage interest rate than the rate they plan to pay. The new rules are estimated by Toronto-Dominion Bank to impact at least 5-10% of homebuyers.

Most buyers in Canada do not have the amount of money required to purchase a home and require a mortgage loan (mortgage for short) for the purchase. A mortgage is linked to the value of the home and used as security by lenders in cases of mortgage default. Financial institutions provide mortgages to buyers who qualify for mortgages based on mortgage rules that the OSFI defines.

When a person applies to obtain a mortgage from a regulated financial institution, their income is assessed to gauge the ability of the borrower to repay the amount the institution lends. The borrower’s income is one of the financial resources a financial institution must verify. Financial institutions also check to see that the borrower does not take on more than 32% of their income for mortgage payments, allowing the rest to be spent for other necessities, such as food, transportation, taxes, etc.

Mortgage payments are calculated using the amount of capital borrowed, the mortgage interest rate , and the amortization. The capital is the amount of money the borrower requires. The amortization is the number of years required to pay off the amount owing, normally 25-30 years. Interest rates in Canada are expected to continue rising. The higher the rate the higher the payment.

The Financial Post has posted an article which they updated online on October 20. The article suggested that the new rules can be easily gamed since they only specify an interest rate and not a mortgage amortization. Rob McLister, founder of ratespy.com, provided an example based on an imaginary mortgage applicant with an income of $60,000 per annum.

McLister claims that the applicant above would qualify for eighteen percent less capital based on the new rules which require the mortgage rate used for the qualification process be 2% higher than current rate. However, since the new rules allow any amortization rate to be used, he suggested that increasing the amortization from the standard 25 years to 35 years will result in decreased mortgage payments, which in turn would allow the imaginary buyer to qualify for buying a house that is 18% more expensive.

Home prices in many cities in Canada, especially those in Vancouver and Toronto, have been escalating precipitously in recent years. The reason for the tightening of the rules is to protect Canada from mass mortgage defaults as those that occurred in the United States during the financial meltdown of 2007.

The most expensive housing market in Canada is located in Vancouver, British Columbia. The British Columbia provincial government attempted to cool down home prices by enacting legislation in August of 2016 that amongst other measures implemented a fifteen percent tax on foreign buyers. Foreign buyers have been blamed for the rapid increase in home costs.

Toronto, Ontario is the second most expensive housing market in Canada. The government of Ontario followed in the footsteps of British Columbia and tried to cool down the housing market and also introduced legislation, including a foreign buyer’s tax, in April 2017.

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