The Office of the Superintendent of Financial Institutions (OSFI) has the crucial responsibility of maintaining the stability of the Canadian financial system. Among its many functions, it actively supervises the credit market, particularly the mortgage segment. Although OSFI deals mainly with institutions under federal jurisdiction, Desjardins, although a cooperative and not a bank, applies its guidelines in the same way as the major national banks.
Nearly ten months ago, OSFI initiated a national consultation to gauge industry opinion on potential changes to mortgage qualification criteria. The main objective was to mitigate the risks associated with increased indebtedness in the face of rising interest rates.
Following this consultation, OSFI shared a summary of the feedback received, revealing two major points:
- OSFI was considering introducing additional qualification criteria, which raised concerns among mortgage lenders and brokers. However, current indications suggest that OSFI may not pursue this route, offering preliminary relief to the industry.
- To everyone’s surprise, OSFI clarified an ambiguity surrounding an alleged restriction in the mortgage industry, indicating that the restriction had in fact never existed. This reveals that some financial institutions had more flexibility than they realized, and borrowers were unnecessarily penalized.
OSFI had considered introducing a “debt-to-income” ratio and a “loan-to-income” ratio, which would have limited borrowers’ indebtedness to 450% of their gross income. This would have complicated the purchase of income properties, for example. These criteria would have been added to the ABD and ATD ratios, existing measures that consider the borrower’s income.
Another significant element concerns the “stress test” that borrowers must pass, based on an interest rate 2% higher than the contract rate. OSFI clarified that many borrowers could have benefited from better conditions had this misunderstanding not persisted for years.
In conclusion, while changes are in the offing, OSFI’s clarification of this alleged restriction could have a major impact on the market, enabling borrowers to better negotiate their loan terms at renewal.
When renewing a mortgage, a broker can often offer more advantageous terms than your current financial institution. However, it was previously required to qualify the loan on the basis of the offered rate plus 2%. As a result, many customers found themselves unable to transfer their loan, even though they were able to renew with their bank on less favorable terms.
For example, one customer could have benefited from a 5.64% 5-year fixed rate. However, unable to qualify for the 7.64% rate (i.e. 5.64% plus 2%), she had to accept her bank’s offer of 6.19%.
This situation demonstrates a lack of consistency in the previous terms and conditions.
We are convinced that adjustments could be made to the regulations governing first-time buyers. While the application of a stress test for variable-rate loans seems relevant to us, its imposition for terms of five years or more does not find an indisputable logic in our eyes. What’s more, if we look at historical trends in property prices over the last two decades, the idea of opting for 30 or 35-year amortization periods for insured loans could present an attractive solution for the new generation. The latter, faced with an ever-changing real estate market, seems to be relegated to the status of perpetual tenant. It’s vital to think of innovative alternatives to meet these new challenges.
