By Garry Marr and Barbara Shecter
Canada’s top banking regulator is taking aim at uninsured mortgages in the latest effort to cool overheated pockets in the country’s real estate market.
Proposals unveiled Thursday by the Office of the Superintendent of Financial Institutions (OSFI) would require stress tests to qualify for all uninsured mortgages, and would make the qualifying rate for these mortgages the contract rate plus two per cent.
“If you really want to influence the market, you have to influence the non-insured segment of the market,” said Benjamin Tal, deputy chief economist at CIBC World Markets.
The changes proposed by OSFI, if finalized later this year in their current form, could slow growth in mortgage originations by a full percentage point to around 4.5 per cent, he said.
Tal said insured mortgages account for about 45 per cent of originations, but that is expected to shrink to around 25 per cent within three years due in part to earlier tweaks to the rules for mortgage insurance.
Toronto and Vancouver
Doug Porter, chief economist with Bank of Montreal, said the impact of OSFI’s new proposals would be felt in the country’s hottest housing markets.
“If adopted, it will have a significant impact on the Greater Toronto Area and Vancouver markets (which have been dominated recently by non-insured borrowers),” he said.
The federal government and the banking regulator have been taking steps since last year to cool the housing market and reign in risks taken on by lenders as house prices soared. Most of the recent efforts have focused on the insured segment of the market largely backed by government insurance.
In addition to the broader new rules for the uninsured market, Thursday’s proposals would require federally regulated mortgage lenders, such as banks, to consider and adjust for the local market conditions when they use loan-to-value (LTV) measurements as a risk control.
“OSFI is emphasizing the need for prudence when valuing a property for the purpose of underwriting, calculating LTVs, and setting lending thresholds for uninsured mortgage loans,” the regulator said in Thursday’s document.
Home equity lines of credit, or HELOCs, are to be treated with the same prudence, the regulator said.
A third proposal is to prohibit co-lending or mortgage “bundling” arrangements that appear designed to circumvent regulatory requirements. This would hit a small segment of the mortgage market — estimated at less than one per cent by ratespy.com founder Rob McLister. He said the co-lending probation, if adopted, is expected to have the greatest impact on mortgage companies that primarily provide loans to people who don’t qualify for funding from the big banks.
“Apart from raining on the parade of non-prime lenders, this will have little impact on the housing market,” McLister said.
In 2016, Ottawa tightened the rules on lending by requiring that anybody with a loan backed by the federal government – through mortgage insurance — had to qualify based on the posted five-year fixed rate set by the Bank of Canada, as opposed to the lower rate on their contract.
The current five-year fixed rate is based on the most common rate for that term at the six major banks. It currently sits at 4.64 per cent, about 200 basis points higher than actual rates — effectively meaning consumers must qualify based on the ability to make a much higher monthly payment. That ultimately means a smaller loan.
The new rules applied to consumers with less than 20 per cent down, and any mortgages put into government-backed securitization programs were also subject to the test.
After these changes, market watchers noted that the government and regulators had not targeted uninsured mortgages — a growing percentage of the market since Ottawa made changes to restrict its backing to homes worth less than $1 million.