Homewners looking to turn their home's equity into cash will have less access to their nest egg than before, following a new change made today by the nation’s federal banking regulator.
The Office of the Superintendent of Financial Institutions (OSFI) has tweaked its guidelines and increased borrowing restrictions for several “innovative” Real Estate Secured Lending Products (RESL) including reverse mortgages, and Combined Loan Plans (CLP).
The move is part of an effort to ensure federally regulated financial institutions (FRFI) are well prepared to withstand any systemic economic risk or shocks, by tightening their underwriting requirements to limit the amount property owners can tap into their equity.
“OSFI is continuously monitoring the economic environment for a range of vulnerabilities that could pose a risk to the health of Canada’s financial system,” said Peter Routledge, Superintendent at OSFI. “Today, we have asked federally regulated financial institutions to make their innovative mortgage products safer and more sustainable over the long term. We are confident that our actions today will contribute to the continued resilience of Canada’s residential mortgage lending industry, and in turn of our financial system.”
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Of particular interest are CLPs, which blend a traditional, amortizing mortgage with a line of credit based on the home’s equity (HELOC). Under the new revamp to guideline B-20, the maximum amount borrowers can access on a revolving basis will be limited to 65%, from the previous 80%. Those with existing CLPs will still have access to their revolving portion; however, should they be carrying an existing LTV above 65%, a portion of their payments will start to go toward their principal mortgage amount until the LTV is below that threshold, upon which it will not be re-advanceable. New CLP applicants will not be able to access more than revolving 65% LTV at their loan origination; any debt above this threshold (up to 80%), must then be amortized, like a traditional mortgage.
The 65% LTV limit will also be applied to new reverse mortgage applicants.
Borrowers wouldn’t be impacted by this repayment term until their CLP comes up for renewal, after either October or December 2023, depending on their lender’s fiscal year.
According to OSFI, the majority of borrowers who use CLPs won’t be impacted by today’s announcement.
“Today’s actions are actually quite modest,” said OSFI Vice-Superintendent JameyHubbs in a call with reporters, “They are designed to alleviate the credit risk in the mortgage market. Of course, Canadians are allowed to take out loans, and they are allowed combined loan programs with HELOCs -- what is key to understand though, is they can do that up to 65% LTV, and anything beyond that limit has to be amortized and non-re-advanceable. This is a clarification of our expectations in light of the growth that we’ve seen over the last little while.”
According to Bank of Canada data, as of March 2022, CLPs that are above 65% LTV account for $204B of the $1.8T total outstanding residential mortgages. OSFI points out that, like standalone HELOCs, these types of products carry a heightened risk for lenders, as they amplify the risk associated with persistent, outstanding borrower debt.
Rob McLister, Mortgage Analyst at Mortgagelogic.news, tells STOREYS this is "pretty much the least potent OSFI mortgage rule change I've ever seen. I heard they were considering a variety of other measures. Clearly they didn't want to upset the apple cart with home prices falling off a cliff."
He points out that the largest change will be for borrowers who wish to re-advance their principal amount to a HELOC, once they pay down the principal in the amortization portion. "Effective late next year, borrowers will no longer be able to do that. That is, unless they get a re-advanceable from a non-federally regulated lender that doesn't follow OSFI's rules, like a credit union," he says.
“The expectation in Guideline B-20 that any and all lending above 65 percent LTV be amortized is intended to limit the extent and duration of borrower indebtedness, thereby limiting FRFIs’ exposure,” states OSFI’s advisory.
“Sound mortgage underwriting remains the cornerstone of a healthy residential mortgage lending industry. We are confident that our actions today are responsible, fit for purpose and contribute to its continued resilience. By acting prudently, making evidence-based decisions, engaging with regulatory partners, and being clear about our expectations of lenders, OSFI is building a foundation of stability regardless of what lies ahead,” states their release.
