Experts find loophole in regulator’s new rules for mortgages
New rules designed to ensure that homebuyers in the uninsured mortgage market can withstand rising interest rates contain a loophole that lenders could exploit to qualify more mortgages, according to industry sources.
In guidelines published Tuesday, the Office of the Superintendent of Financial Institutions pushed ahead with plans to force low-ratio borrowers — consumers with down payments of 20 per cent or more — to qualify based on the higher Bank of Canada five-year posted rate, or two percentage points above their contract. All else being equal, both measures mean that consumers ultimately should qualify for smaller loans.
But mortgage industry experts are now pointing out that OSFI did not regulate the length of the amortization used in the qualifying calculation, which involves ensuring that only a certain percentage of your monthly household income be dedicated to housing costs.
A longer amortization period reduces the monthly payment at a given interest rate, meaning loan providers could potentially create a smaller monthly payment that would qualify more buyers.
“You can increase the amortization and clearly you can go longer,” said a source, adding he didn’t expect the major banks to take advantage of the loophole. “This was done to release some of the pressure (from increased stress testing).”
The real estate industry had been lobbying heavily for some last minute changes.
A Toronto-Dominion Bank report said the stress test will likely further slow housing activity, depressing demand by five per cent to 10 per cent once implemented on Jan. 1, 2018.
The amortization change could mitigate the impact. Rob McLister, founder of ratspy. com says the crackdown is close to a wash if lenders use the loophole.
In an emailed response, OSFI officials noted banks can’t qualify borrowers using any amortization, but rather the contractual amortization of the mortgage. “While OSFI has not included specific references to a qualification amortization rate in its final guideline, we will be monitoring FRFIs’ (federally regulated financial institutions’) practices ...,” said the official.