If you think it’s hard to qualify for a mortgage in now, just wait a few months.
In January, the Office of the Superintendent of Financial Institutions, the government body that regulates Canada’s federally-registered banks and loan companies, announced three potential changes to the country’s mortgage rules. Each one could make the uphill battle for homeownership even steeper.
We’ll discuss the why’s and whether-or-not’s of OSFI’s proposed rule changes in a bit. First, let’s look at the changes themselves and see if there’s anything you can do to get ahead of them.
What OSFI is proposing
1. New limits on loan-to-income ratios
OSFI currently doesn’t put any official limits on loan-to-income ratios, or LTI, but they may as a means of controlling the amount of mortgage debt borrowers can take on.
One proposed option is to establish an LTI threshold for borrowers, possibly as high as 450%. If such a limit is implemented, borrowers will not be granted a mortgage if the home being purchased is worth more than 4.5 times the buyers’ total gross income.
If implemented, borrowers would have to earn a gross income of $222,222 for lenders to finance the purchase of a $1 million home.
The other option is to restrict the number of loans issued to borrowers whose LTIs exceed the threshold. The suggested industry-wide limit is 25% of the total dollar amount of mortgages lenders originate per quarter.
2. GDS and TDS limits for uninsured borrowers
Gross debt service and total debt service limits are currently in place for insured mortgage borrowers — those who make down payments of less than 20% and are required to pay for mortgage default insurance as a result. The maximum GDS and TDS ratios allowed by law are currently 39% and 44% of monthly household income, respectively.
OSFI is now considering GDS and TDS limits for Canada’s uninsured borrowers — those who make down payments of 20% or more. No specific ratios have been suggested publicly, but OSFI could use the same ratios currently applied to insured mortgages, or devise new ratios that involve tiered limits.
OSFI has also floated the idea of capping either the number or dollar value of mortgages lenders are able to grant to borrowers with high debt service ratios.
3. Updates to the mortgage stress test
Rather than suggesting an increase or decrease in the minimum qualifying rate instituted by the mortgage stress test, OSFI has recommended changes to how the stress test is applied.
The MQR — 5.25% or 2% higher than the rate offered by a lender, whichever is higher — is currently only a factor in the GDS calculations of the underwriting process. OSFI is proposing applying the MQR to TDS calculations, too, which could make qualifying even more difficult.
But OSFI has also suggested affordability tests that better reflect a mortgage product’s assumed riskiness. Variable-rate mortgages, for example, because they carry more risk, may require more stringent affordability tests than long-term fixed-rate mortgages. A more case-sensitive set of affordability standards could benefit borrowers who choose less risky products.
What prospective borrowers can do
One thing not to do is panic. OSFI hasn’t announced any official changes, and is still accepting feedback from mortgage industry stakeholders regarding its proposals until April 14, 2023. There’s no need to rush out and shoehorn yourself into an expensive mortgage — ever.
But there is a chance that some, if not all of the changes will come to pass. If they do, expect a decline in the amount of mortgage capital available to highly indebted Canadians.
If you fall into that category, there are two things you can do to limit the effect these changes might have on your ability to buy a home: work on paying off your debts and save up a larger down payment so you can apply for a smaller mortgage.
Easier said than done, yes, but if lenders will be scrutinizing your debt levels more closely, it’s in your best interest as a home buyer to show them what they want to see.
Does Canada need stricter mortgage rules?
Rising interest rates and record consumer indebtedness create “an elevated risk environment, where financially stressed borrowers represent a significant potential vulnerability for lenders and the Canadian financial system,” OSFI said by email.
But recent data shows that Canadian homeowners currently pose little risk to the country’s lenders. In November, only 0.15% of residential mortgages held at Canada’s major banks were in arrears, according to the Canadian Bankers Association. (A mortgage is considered in arrears if the borrower has missed three or more payments.)
Phil Soper, president of real estate brokerage Royal LePage, characterizes Canadians’ proven ability to repay their mortgages as “among the best in the world, if not the best in the world.” He says OSFI’s proposed changes are responses to theoretical risks, not actual ones.
“I know for us, in our business, we use metrics and ratios to understand when something is out of whack, and then we make adjustments,” Soper says. “In this case, it’s hypothetical modelling, and not an actual problem that OSFI seems to be focused on.”
More stringent lending requirements could have the unintended consequence of injecting more risk into the housing market, Cecely Roy, director of communications at Mortgage Professionals Canada, said by email.
“Introducing further restrictions in the context of the heightened rate environment and persistent inflation creates the risk conditions of pushing average Canadians out of the federally related system and into riskier and more costly mortgage solutions,” such as private lenders, Roy said.
OSFI disagrees: “Many non-federally-regulated lenders apply requirements similar to ours,” it said in an email. But it’s fair to wonder how carefully those requirements are being applied, or just how similar they are.
The percentage of non-bank-issued mortgages in arrears in the third quarter of 2022 was 2.1%, according to Statistics Canada — almost 15 times the average arrears rate at mainstream lenders over the same period.
Both OSFI and Roy stressed that the proposed changes are still up for debate, so the impact they could have on borrowers is purely speculative at this point. But it’s probably not a bad idea to start prepping your finances for an even more challenging run at the market.
Canada Mortgage Payment Calculator
Use this free Canadian calculator to estimate your monthly mortgage payments, and see how rates and amortization affect total cost over time.