Posted On Oct 24, 2017

I have written on these changes when they were only proposals. Now that the changes are formally announced, it is my opinion that the unintended consequences of these changes are not fully understood. My initial thoughts.....

1. Our Federally regulated financial institutions (FRFI's) are now fully compelled to follow a specific set of qualifying guidelines for the granting of any personal loans secured by residential real estate. This now includes non-insured loans/mortgages. The lending activity of our FRFI's will be closely monitored for compliance and there will be consequences for non-compliance.

2. We all want a sound banking system with prudent lending policies, however now seemed like the time to allow previous rule changes to fully work themselves through the system, not ram through what could potentially be overkill. A slower approach, especially with rising rates, would have seemed more prudent. And it could happen that the race towards tightening could prove to actually be the reckless approach, not the other way around.

3. The changes take effect January 1, 2018 and the stress test rate to be used will be the higher of the 5yr prescribed rate or the contract rate plus 2%. So today if the contract rate for a mortgage is 3.24%, the qualifying rate will be 5.24% NOT 4.89% which is the prescribed rate. In such a scenario, the prescribed rate will apply to insured deals - but those insured deals are subject to a maximum 25 year amortization.

4. Non FRFI's will enjoy an obvious advantage unless they decide to enforce the same rules, so as not to be seen as contradicting the spirit of what the Federal Government is trying to do. So far institutions like Credit Unions have generally stayed in step with OSFI's criteria.

5. Private lending sources and other kinds of Financial Institutions not regulated by the Federal Government may emerge - but the cost of borrowing for home owners will rise.

6. Borrowers need to get used to higher rates and fees as the marketplace adjusts to these changes, and a whole segment of people with 20% down or more will no longer be able to get their mortgages done through an FRFI.

7. I'm not sure how this change will affect market values but I suspect it will have downward pressure on them.

8. Encourage everybody you know who was on the fence about doing a refinance to get it done before the end of the year - after that they may only qualify for a smaller amount.

9. Unfortunately with some unethical players, there will be more fraud.

10. The timing of this announcement so close to the tax rate announcement of yesterday was no coincidence. And the political fallout of this announcement especially if it results in a deeper real estate correction than was otherwise necessary will be bad for the current Liberal Government. A political price will be paid.

If you have any questions, please feel free to reach out to me.

Robert Bizzoni - Mortgage Agent
The Mortgage Centre - Your Mortgage Professionals
416.931.3893 /