OSFI sets new mortgage rules beginning January 1, 2018

New rules could drive homebuyers to unregulated lenders, says RBC

Starting January 1, 2018, Canadian homebuyers will need to meet stiffer guidelines in order to qualify for a mortgage with a federally regulated mortgage lender.

As expected, Canada’s banking watchdog, the Office of the Superintendent of Financial Institutions Canada (OSFI), confirmed October 17 that starting next year, all borrowers – even those who have down payments of 20% or higher and do not require mortgage insurance – will need to qualify for mortgages that are two percentage points higher than the rates at which they are applying.

The rules were proposed as a measure to decrease the risks for households with high levels of indebtedness as interest rates rise. RBC said these risks will likely decline long-term as a result of the measures, but in the short term, the new rules have the potential to “rock the market,” because non-insured mortgages represent a high percentage of the total mortgage market; the bank said 45% of mortgages at domestic banks are currently uninsured.

“Nonetheless, the ultimate impact on the housing market will depend on the extent to which borrowers will ‘migrate’ to non-federally regulated mortgage lenders that will not be subject to the new OSFI rule,” the bank said in a press release. “These lenders include provincially regulated credit unions and caisses populaires.

“Our view is that such migration is likely to be material.”

RBC it expects there to be a “brief run-up in activity” until the end of this year as homebuyers rush to qualify for mortgages before the new rules come into effect; after January 1, 2018, activity in the housing market is expected to drop. The bank still expects a soft landing for Canada’s housing market.

“We expect that, at the margin, the higher qualifying rate will drive some buyers out of the market and reduce the budget of others next year – both factors adding downward pressure on prices,” RBC said. “Yet the odds of a crash-landing are still low.”

The move comes a week after the Fraser Institute released a study that said these new rules will do more harm than good, as loan pricing will likely increase while fewer people will be able to access mortgages.



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