OSFI’s Mortgage Qualification Standards: What’s Changing and What’s Surprising

First, a question for you. Remember OSFI? I explained this to you in detail at the beginning of the year. Congratulations if the acronym still evokes a vague memory for you, and if it no longer means anything to you, there’s no need to make a complex out of it. I myself have forgotten parts of it, starting with my January column on the subject. I had to go back.

OSFI, therefore, as in “Office of the Superintendent of Financial Institutions”. I explained the role of the organization. It monitors the stability of the Canadian financial system, among other things, by guiding the credit market, particularly that of mortgage loans. Its scope is limited to institutions under federal jurisdiction, which does not prevent Desjardins from applying the rules like the big banks.

Ten months ago, the “BÉSIF”, as they say, launched a national consultation to take the pulse of the industry with regard to changes it was considering making to mortgage qualification standards.

The aim of the exercise is to stem the risks posed by massive debt in a context of rising interest rates.

The organization published a report of these consultations last week, without much impact here. He made known the market reactions to his initial proposals, and he commented on them. These remarks offer clues, they allow us to conjecture.

We will know the bottom line of the matter early next year. But already, we have something interesting.

What comes out of it? Mainly, two things:

1. OSFI was considering implementing additional qualification criteria, much to the dismay of lenders and mortgage brokers. According to what we can read between the lines, he will give up doing it. We can’t swear to anything for the moment, but industry players seem relieved by OSFI’s preliminary report.

2. The latter caused astonishment, to say the least, by asserting that a restriction to which the mortgage lending industry believed itself to be forced did not really exist, in fact. Financial institutions apparently had room for maneuver that they did not suspect, and had done so for years. Borrowers are still paying the price.

What were these new criteria that the Office of the Superintendent of Financial Institutions wanted to implement? A “debt-to-income” ratio and a “loan-to-income” ratio. For example, a borrower would not have been able to qualify for a loan if all of their debts represented more than 450% of their reported gross income. Such a criterion would have made the purchase of an apartment building, among other things, particularly difficult.

These conditions would have been added to two existing criteria which already take income into account, namely the gross debt amortization ratio (ABD) and the total debt amortization ratio (ATD). The ABD represents the percentage of monthly income dedicated to housing; it must not exceed 39%. The ATD includes all debts, the limit is located at 44%. The CMHC website details the calculation method.

This is the other point that surprised everyone in the industry. It concerns the stress test to which borrowers must submit. These must meet the ABD and ATD ratios, but on the basis of an interest rate 2% higher than that entered in the contract. OSFI calls this safety margin the “minimum allowable rate” (MAT). So, we must satisfy the ratios with a TAM of 8% currently, in the best case scenario.

The test is mandatory for all borrowers, those taking out a new mortgage as well as those renewing their loan. The only exception: if you stay with the same lender without requesting refinancing (by increasing the amount borrowed or extending the amortization period).

In fact, that’s what everyone in the industry believed, until OSFI dropped this sentence in its report released last week, discussing the current situation: “[…] Insured borrowers are exempt from the prior application of the MAT when they change lenders at renewal because their credit risk has been transferred to the mortgage insurer for the life of the loan.”

For several years, the industry has understood the opposite. And apply it. This means that borrowers who do not qualify with the TAM at renewal are stuck with their original lender, because other financial institutions believe they are obliged to apply the stress test. The unfortunate result: customers in such a situation cannot take advantage of competition to take out a more advantageous loan.

Given that a good portion of mortgages are insured by CMHC or one of the two private insurers, many indebted people could have benefited from better conditions without this “misunderstanding” which has lasted for years. It’s appalling.

There is nevertheless cause for celebration, because we deduce that people who renew their insured loan without satisfying the stress test, who will soon be more numerous than ever, will be able to shop around for their mortgage.

Of the changes to come, this is the one we can be most sure of. But if OSFI is to be believed, it’s not really one.

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