City News Update March 22 – New mortgage regulations in Canada

Clinton Wilkins joins Rob Snow on City News to discuss a significant change in mortgage regulations taken by the Office of the Superintendent of Financial Institutions, OFSI. The change impacts borrowing limits and the amount lenders can give out based on annual income. They dive into the implications of what Clinton calls the stress test 2.0, and highlight some predictions made by economists regarding soon approaching softened rates.

New mortgage regulations in Canada

Rob Snow
I want to get right to our next guest Clinton Wilkins, is with the Clinton Wilkins Mortgage Team Centum home lenders in Dartmouth, because we have some big news to talk about today involving mortgages. First of all, hi there, Clinton. Hope you’re well.

Clinton Wilkins
Thanks for having me, Rob! How’s your day going?

Rob Snow
It goes well, I have to get your reaction to this. This has been posted by the Globe and Mail now, within the last hour. This is a very significant news story here, OFSI is the Office of the Superintendent of Financial Institutions, basically the banking regulator in this country. So I’m just going to read from the Globe and Mail, if you’ll just bear with me, the Office of the Superintendent of Financial Institutions, has told lenders they will have to limit loans to borrowers with mortgages greater than four and a half times their annual income. According to two sources familiar with the matter, the Globe and Mail is not identifying the sources. Banks will be allowed to exceed this new income ratio for some clients, the source has said, creating scope for relief for borrowers in expensive cities like Toronto and Vancouver. But the lenders will also be subject to overall caps on their mortgage loans that will limit the amount of discretion they can offer. The new rule will only apply to new mortgages, not to existing loans or to loans that come up for renewal, according to a summary of the measures reviewed by the Globe and Mail. What’s your reaction to that?

Clinton Wilkins
I’m not surprised, to be honest. We were expecting something like this to happen. I think that, you know, OFSI was saying that they were considering something like this for a while. I think part of the reason is, that if we do see a situation where they roll back the stress test, they need to have another mechanism where they can, you know, really justify the amount of mortgage dollars that each borrower gets. This is something very similar to what is going on in the US right now. So this number of four and a half times, you know, a borrower’s annual income is the max amount of mortgage, you know, is another, facility for us to determine what people can afford. Right now we’re really determining their affordability based on like a GDS, TDS numbers. And the four and a half times may be another layer on top of that, and that may impact you know, how much people can borrow. The interesting thing is, you know, OFSI was telling these financial institutions yesterday, and they have until I think Q1 of next year to put a plan in place, and every financial institution is going to have a different number on the the cap of overages. So I think it’ll it’ll determine, you know, different lenders may still have different appetites, but also different lenders may have a different limit of that bucket of mortgages that will be over that four and a half times number.

Rob Snow
So is this something you think that borrowers should be concerned about that they may be, I don’t know, shut out of the market? What are some of your concerns here, Clinton?

Clinton Wilkins
I think it certainly can be very challenging. You know, especially in markets like Ontario and BC, where I think in some cases, it’s five and six times annual income that people are able to borrow. You know, specifically, when the rates are very low, borrowers can take a bigger mortgage. Rob the challenges right now, borrowers can’t even get to that four and a half times number in many cases, because the rates are higher. You know, it’s certainly, they’re putting it in place to, you know, really combat the real estate industry. They want to limit the amount of mortgage that borrowers can get. For me, we want to do what is going to protect the borrower. We also want to protect lenders and, you know, the Canadian real estate market. But this is certainly going to be restrictive. Specifically, when the rates do start softening. It’s not going to enable borrowers to borrow more than really they’re able to borrow right now at these higher rates.

Rob Snow
Okay, I want to ask you about something else. Just a lot of news to cover.

Clinton Wilkins
It’s really stress test 2.0 Rob. I think that’s the interesting thing.

Rob Snow
You know, the Competition Bureau issued a report this week, it was out yesterday, and it was looking at a lack of competition, how that impacts affordability for for customers when they interact with banks. And it’s urging the federal government to drop the requirement for some borrowers to pass the mortgage stress test at renewal. What do you think about that?

Clinton Wilkins
I think that’s very fair. I think if you already had the stress test, and you’re just looking to move from lender to lender I don’t think there should be a stress test. I can tell you right now, if you have an insured mortgage, and you’re moving to another lender, you don’t need to re qualify with a stress test, you need to re qualify on your contract rate. The stress test was really important, Rob, when the rates were low, the stress test was protecting borrowers really from themselves. And you know, putting a limit in place. And that’s what’s enabling the Canadian mortgage bulk we’ll call it. All these borrowers that are renewing into these much higher interest rates that really have been happening the last 18 years or 18 months, I should say. These borrowers are in a better financial position now and we know they can afford their mortgage because they had already gone through the stress test. You know, we don’t need the stress test today. Like I’ll go out there on a limb and say, it could be eliminated, especially in this environment when the rates are high. You know, we are forward thinking that the rates are going to be less. That’s what economists are saying, they’re saying that the rates are going to be less as soon as maybe June of this year. So right now clients are already qualify on a very high rate and in some cases, with the stress test, we’re qualifying borrowers on rates at nine and nine and a half percent. That can be very restrictive. And I believe that is, you know, limiting the amount of competition. There are borrowers we see every day that have no choice but to renew with their existing lender, because they can’t qualify on the stress test to be able to move their mortgage from institution to institution.

Rob Snow
Okay, thank you. You’ll have a lot to talk about on Mortgage 101 the next time we do that show so thank you so much.

Clinton Wilkins
We will, it’ll be an hour I’m sure of just talking about you know what’s going to happen here in the coming weeks and months.

Rob Snow
Okay, thank you so much Clinton. Great to hear from you today when dealing with that breaking news force. Yeah, Clinton Wilkins. Clinton Wilkins Mortgage Team Centum Home Lenders, Dartmouth Nova Scotia. I’m Rob snow. This is Now You Know.