The Guideline applies to all federally regulated financial institutions who are involved with residential mortgages and compliments the existing Bank, Trust and Loan Companies, Insurance Companies and Cooperative Credit Association Acts.
The 5 Main Principles of the Guideline:
1. Thorough underwriting policies
2. Due diligence to assess the borrower’s identity and background
3. More in-depth look at the borrower’s capacity to service the debt
4. Sound appraisal process
5. Effective credit and risk management
To allow time for these changes to be implemented, OSFI expects full compliance by the end of the 2012/13 fiscal year; for major banks this would be October 31st, 2012 and for other institutions March 31, 2013.
In the Spotlight: What Top 3 Changes Will Consumers Feel the Most?
The maximum loan to value (LTV) of a Home Equity Line of Credit (HELOC) has decreased from 80 per cent down to the proposed 65 per cent. OSFI feels as though HELOCs are a riskier product since they are revolving in nature with persistent balances and are not eligible for default insurance – as a result, their LTV has decreased to a maximum of 65 per cent. There was one area that OSFI budged on though, and that was to agree not to amortize HELOCs as revolving credit and interest-only payments are fundamental features. Consumers will now be forced to retain a certain level of equity in their homes when considering the HELOC product.
#2 Qualifying Rate
The qualifying rate is being standardized across federally regulated lenders as well as for conventional mortgages. If you are applying for a variable rate mortgage or your fixed mortgage term is less than 5 years, you will have to qualify based on the greater of the mortgage contract rate or the Bank of Canada 5 year benchmark rate. This could effectively make it more difficult to qualify for a mortgage for the variable and short-term fixed mortgage products; however it ensures that you will be able to financially support a mortgage payment and protects you against future rate hikes.
#3 Extinct Risky-Mortgage Products
Cash back mortgages and stated income mortgages are no more! That’s right, you cannot use the cash back portion of a mortgage as part of your down payment – this effectively eliminates the 100 per cent financed (or zero down) mortgage. And if you are business for self or looking for a “low document” mortgage, well, they don’t exist any more! You can no longer get by with stating a reasonable income and not provide documentation for it. Lenders will now require proof of income in the form of Notice of Assessments and/or business financial statements. People who are self-employed might think twice before writing off all expenses and claim a little more income to qualify for that mortgage now!
Interested in seeing a copy of the final draft guideline? Click here.