On the same day that the Minister of Finance announced significant changes to mortgages, The Office of the Superintendent of Financial Institutions Canada's (OSFI) released and set out their additional, final mortgage underwriting guidelines. These changes apply to federally regulated lenders only (provincially regulated institutions such as credit unions may choose to follow).
Here are the high points on what's changing:
1. HELOCs: The maximum loan-to-value on a Home Equity Line of Credit (HELOC) will drop from 80% to 65%. Lenders can still provide a 15% amortizing mortgage on top of a HELOC, for an 80% loan-to-value total. Clients who currently have a HELOC in place will be grandfathered, but new applications will be impacted.
2. Qualifying Rates: The qualifying rate is being toughened for conventional mortgages. For variable rates and fixed terms less than five years, the qualifying rate will be "the greater of the contractual mortgage rate or the five-year benchmark rate published by the Bank of Canada (currently 5.24%)."
3. Stated Income: Going forward, all self-employed borrowers must provide "reasonable" income verification (such as a Notice of Assessment). Most lenders already have such policies in place. In the past some lenders offered a "no-income documentation" stated income mortgage, but these will no longer exist for federally regulated lenders. There are still some broker channel lenders that will continue to offer these options.
4. Down Payments: "Cash back should not be considered part of the down payment," says OSFI. This effectively eliminates 100% financing. Several major banks still offered cash back mortgages, allowing people to finance the required 5% down payment. This officially ends that practice.
There are also other changes that may affect non-prime mortgages, but the above have the broadest impact. Lenders are still working to process these changes and as they update their policies we will learn more about the full impact of this announcement and share that with you.
Federally regulated lenders have until "no later than fiscal year-end 2012" to comply with these guidelines. That ranges from October 31, 2012 for major banks to March 31, 2013 for other institutions. OSFI does expect them to comply sooner if possible, so we may see some of these changes very quickly.
Here is the link to the full OSFI guideline: