Yesterday, Canada’s banking regulator made a tweak to its Guideline B-20, the set of protocols governing residential lenders’ mortgage underwriting practices, specifically, for real estate secured lending products (RESL).
The Office of the Superintendent of Financial Institutions (OSFI) announced that as of winter 2023, Canada’s consumer lenders must cap the loan-to-value (LTV) ratio for borrowers of Combined Loan Plans (CLPs) -- a popular product that combines a traditional mortgage with a revolving equity-secured line of credit -- to 65%.
Existing CLP borrowers with an LTV higher than that will be put through a repayment period (upon their renewal after either October or December 31, 2023, depending on their lender’s fiscal year), where their payments will go towards their principal, until it is below 65%. The 65% threshold will also now apply to reverse mortgages at origination.
With CPLs gaining in popularity, OSFI has grown increasingly uncomfortable with the heightened risk they can pose to lenders; as their debt is revolving, they can lead to a quickly spiralling default scenario if not paid back promptly. Bank of Canada data cited by OSFI states that CLPs with an LTV about 65% make up $204B of the nation's total $1.8T in outstanding residential mortgage debt.
READ: As Interest Rates Rise, Are HELOCs Becoming Too Risky?
However, the mortgage industry has been somewhat underwhelmed by OSFI’s recent move; given the rapid rise of Canadian home prices, and the presence of investor speculation in the market, it was widely anticipated that the regulator’s change would have more teeth to it.
In fact, it’s a “nothingburger”, says Ron Butler, mortgage broker at Butler Mortgage.
“This is simply putting into formal regulations things which were always part of OSFI Underwriting Guidelines for financial institutions,” he tells STOREYS. “Reverse mortgages in Canada are never funded for more than 55% LTV -- it has been impossible to get 65% for decades. And HELOCs on re-advanceable mortgages have always [had] mechanisms to prevent the HELOC from exceeding 65% of property value. So… Nothing.”
Rob McLister, Mortgage Analyst at Mortgagelogic.news, previously told STOREYS that this is “pretty much the least potent OSFI mortgage rule change I’ve ever seen,” and that the only change will really be for borrowers wishing to re-advance their principal amount to a HELOC, after paying down their mortgage.
Prior to the announcement, speculation had been growing that the banking regulator would take the opportunity to crack down on real estate investors with tougher lending rules, such as increasing the minimum down payment amount required for those purchasing something other than a primary residence, or banning the use of HELOC funds altogether for down payment purposes.
In a previous interview with STOREYS, Butler said that the issue of 100% financing among investors is “a highlighted issue at the Department of Finance,” saying the topic is broached “at least twice a month.”
When asked why he thinks OSFI declined to move forward yesterday with regulations targeting this group, he said, “Clearly a decision was made either at the regulator or and the Department of Finance that there would be no attempt to fundamentally alter the ability of persons to easily access the equity in [their] homes to buy rentals, nor was there any interest in curbing the relatively easy ability to finance those purchases at 80% loan-to-value with effectively 100% financing.”
In a special column to the Financial Post, OSFI Superintendent Peter Routledge pointed out that OSFI’s influence in the housing market, “may have left some observers with the impression that OSFI is Canada’s housing market regulator. We are not.”
He added that as OSFI’s mandate is to supervise and regulate lenders within the Canadian housing system in a way that protects their resiliency, that naturally extends to the resilience of housing finance.
“Our main responsibility within the Canadian housing system is to ensure federally regulated Canadian lenders manage their risk in a manner that encourages sound credit quality within real estate secured lending (RESL),” he wrote.“ This means that the variance in the quality of RESL does not rise to a level that leads to a systemic lack of housing credit availability at the worst possible time. If we put reasonable expectations on the institutions we supervise, just enough to ensure sound risk management in housing finance, but not so far as to overly constrict access to housing credit, then we will have fulfilled our mandate of contributing to public confidence in the Canadian financial system.”
