(Proposed) New Changes to Lending Regulations
OSFI (the banks’ regulator) proposed a new maximum borrowing limit of 4.5x borrowers’ annual income.
This proposed change will LIKELY come into effect in the first quarter of 2025. We do not have an official launch date, or confirmation of whether or not this will become the new rule. I’ve spoken with our TD & Scotiabank representatives and they have not received any guidance as of yet.
How this rule is to be applied
Read the Financial Post News Article HERE
According to the news article above, this regulation won’t be applied directly to the consumer. Instead, OSFI will monitor each banks overall portfolio and apply the new rule to each lenders’ mortgage portfolio.
This new regulation is intended for new mortgage applications – purchases and refinances, not renewals.
This new regulation would essentially be stress-test 2.0.
It will not apply to insured borrowers because the maximum mortgage an insured borrower will qualify for is already roughly 4.5x their annual salary when not factoring the added cost of default insurance.
How will this impact borrowers?
I disagree with this news article. Even with rates at their peak, these changes will certainly have an effect on borrowers’ lending capacity.
Currently, clients qualifying for a new mortgage with a stress-test around 7% can borrow approximately 4.75x their annual salary without any fallback in their savings. And approximately 5.15x if they have +$50,000 in savings.
When rates were lower and we used government stress-test rate of 5.25%, clients could borrow approximately 5.5X their annual salary with little fallback, and upwards of 5.85x their annual income if they had +$50,000 or more in savings.
What will this mean for the Real-Estate Market?
If this regulation is formally announced, there will be a large push by informed buyers to purchase before these rule changes are in place – think 2017.
Once the new regulation is in place, the Real-Estate market may struggle to find the correct pricing on properties – think 2017.
My thoughts
I believe the proposed changes are being slightly down-played by the media. This is essentially stress-test 2.0 and will effect many first-time home buyers and the real-estate market in general.
The regulatory changes would also create more control for the regulator, creating room for manipulation where borrowers ultimately suffer. Bank’s already adhere to strict lending requirements on their loan portfolio, and they control much of their borrowing limits by being competitive with their interest or uncompetitive – Scotiabank just recently went through this period of uncompetitive rates to re-align their borrowing portfolio.
By installing these new regulations borrowers may find themselves paying excessive interest rates if there is only one-bank-in-town making exceptions to the 4.5x loan-to-income rule.
I also foresee lenders qualifying all conventional mortgages at the 4.5x loan-to-income rule to streamline their process, and granting exceptions to clients:
- with secure jobs (accountants, doctors, lawyers)
- those with a large amount of fallback in savings (+$75)
- larger mortgage sizes (+$750k).
In the GVA and GTA the majority of first-time homebuyers are using a gifted down-payment to qualify for the purchase of their first home, but if this goes through, they will also need their parents to co-sign.