Buying a home in the Greater Toronto Area is easier said than done, as the availability of homes for sale is shrinking – but making a home purchase sooner rather than later will be in your best interest, as new mortgages rules are on the way.
A recent announcement from Canada’s financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), reveals banks and lenders who offer mortgage financing will soon face stricter regulations. That ultimately means tougher lending rules for you – the homebuyer.
Reigning in Debt Risk
The increasingly hot housing market (what an understatement!) has prompted lenders to be more cautious with underwriting processes, and to implement higher standards when originating insured mortgages. Mortgages require insurance when less than a 20% down payment is made; a high-ratio insurance premium is added on top of the monthly mortgage principal and interest payments over its term. This is a way to keep housing prices, and unsustainable debt levels, in check.
What is OSFI Planning?
OSFI, an independent agency of the Government of Canada, supervises and regulates financial companies. It has been meeting with the banking sector to create these new guidelines, which will not only impact home buyers in the Toronto and Vancouver housing market, but all buyers across Canada.
The purpose of these new regulations is to place more responsibility on banks to make better lending decisions, for fear that Canada’s housing market is overvalued in some cities. OFSI wants to avoid Canadian borrowers becoming overextended in the event of a potential price correction and real estate market downturn. You see, despite the general view that the banks and government don’t care about the average citizen, this shows they actually do care about our general well-being – but at a cost.
Higher Capital Requirements to Come
In these meetings, which have been going on for at least the past six months, federal Finance Minister Bill Morneau, Crown Corporation mortgage insurer Canada Mortgage and Housing Corporation (CMHC) and OSFI have been discussing the possibility of lenders holding on to more capital from residential mortgages. This would better protect them against defaults – folks who are unable to maintain their mortgage payments, and fall behind on servicing their debt. While no one wants to be in such a position, sometimes life throws in an unexpected curveball such as sudden illness, marital split, pregnancy or a death – factors we can all relate to.
The Challenges of Hanging onto Cash
However, holding onto more money will create additional costs for the banks, as they must now offset the interest that would normally be collected on money lent out in mortgages. Of course, those extra costs will be passed down to you – the borrower.
As well, the possibility of increased mortgage rates or stricter lending guidelines could make it even tougher to be approved for a mortgage in the future. We are starting to see lenders asking for more documentation at mortgage origination as it is – tougher rules will also reduce the amount of mortgage you can apply for. It could mean living in your parents’ basement for longer if you don’t act soon!
Speak Your Mind
Not a fan of higher mortgage rates or tougher lending rules? You have the opportunity to make your voice heard until October 18 by submitting your comments to OSFI.
Some lenders will begin to phase the new rules in by October 31, with stricter rules to come November 1, and to be fully in-force by January 1, 2017. More changes are expected to come in the new year – stay tuned as we break down what they’ll mean for your homebuying experience.