Until (very) recently, Canadians were getting the short end of the stick – at least when it came to income qualifying, compared with foreign buyers. Unlike Canadians, those from outside of Canada could essentially just plunk down 35 per cent on a property in order to buy it; this without some lenders doing serious due diligence on whether they were good for the remaining capital. This had many Canadians furious about the tight guidelines and standards that they were compelled to meet, but that foreign buyers were not. Things changed last month.
You know you’re in hot water when the Office of the Superintendent of Financial Institutions (OSFI) gets involved in your affairs. And that’s exactly what OSFI finally did in response to a number of financial institutions that claimed to have confronted “misrepresentation of income and/or employment” from borrowers. Superintendent Jeremy Rudin made it clear that this was a particular threat when dealing with foreign buyers who, as the Financial Post reported, “pose a particular challenge for income verification.”
Unsurprisingly, Vancouver factored big into the equation. With the hottest real estate market in the country, a big price correction under the current conditions could easily cause catastrophic losses as borrowers default, forcing lenders to bear more losses than they can realistically cover.
In a letter sent by Rudin to financial institutions around the country, he declared that no bank should be using the “exceptionally low” interest rates as a gauge of whether a borrower can pay their debts. He went on to caution banks about the importance of income verification, even if that borrower has a mortgage that meets the loan-to-value caps.
New Rules in Place
It was after more than half of year of negotiations between the Office of the Superintendent of Financial Institutions (OSFI) and Canada’s banking sector, these new lending regulations were set forth and, as we now understand, are being implemented for a number of reasons – one of them being to avoid a catastrophe of the 2008 US housing market variety.
We are already starting to see the impact of the subsequent new mortgage rules that took effect on October 17. Stricter lending criteria have made getting into the market impossible in the Lower Mainland for some of my first-time home buyers altogether. For non-residents, these tighter rules mean the banks are going to have to do more work to ensure that borrowers meet their requirements for a mortgage even if their mortgage is not insured.
Not only that, lenders are going to have to keep more bread in the oven from now on. OSFI has demanded that banks keep more capital on hand should the threat of default become real – which it very well may, if mortgage rates suddenly change – so that the rest of us won’t have to bail them out when it’s time to pay the piper. Failure to comply with this regulation makes the lenders vulnerable to the possibility of OSFI pulling their mortgage insurance.
Increase in Lending Rates
So what does all that mean for borrowers?
More money – but not the kind sitting in your bank account. These stricter regulations could have a trickle-down effect on how much borrowers will have to pay to service their mortgage. TD was the first major bank that discreetly increased their prime rate from 2.7 per cent to 2.85 per cent even with no changes to the Bank of Canada’s overnight lending rate. However, this change continues to allow them to be competitive as their variance off prime became greater for new clients. Unfortunately, existing clients – including myself – are faced with a slightly higher mortgage payment as the overall variable rate has increased.
Fixed rates are affected by Canadian bond yields, which have been on the rise. Almost all lenders have increased their fixed rates for most of their terms, although some are still offering lower promotional rates with short closing periods and for insured mortgages. As of November 17, for example, the Royal Bank of Canada is raising its special offer for a five-year fixed rate mortgage to 2.94 per cent from 2.64 per cent, and raising rates on three- and four-year fixed rate mortgages by a similar amount.
This is a huge change to the real estate landscape in Canada. Before this proverbial tightening of the belt, things were certainly “easier” for borrowers seeking a mortgage. Some of the big five banks didn’t income-qualify foreign buyers as long as they had their 35 per cent in Canada for a period of 30 days, and some offered pilot programs to get around income qualification all together. These programs have since been nixed and providing documentation to prove income for foreigners has become the norm.
It will be interesting to see how high the rates can climb and how many more changes we expect to see in the coming months from lenders as OSFI continues patting them down. Insurers could set prices regionally, taking into account the price vs. income risk in different areas, or mortgages that are bulk insured could lose their competitive edge as they become more expensive for their investors.
Many say that the market was already on its way to correct itself and these changes couldn’t have come at a worse time.