Looking at the Possible New Mortgage Rules on the Way
Canada’s banking regular OSFI is proposing new mortgage rules to protect Canadians further. Let’s look at them and how they may affect you.
Loan-to-income (LTI) and debt-to-income (DTI) limits
If a loan-to-income or debt-to-income limit were introduced, this would limit how much Canadians can borrow as a percent or multiplier of their household income. There is no such measurement currently, but OSFI wants to make one.
OSFI says that a loan-to-income ratio of 450% is too high and is concerned that this figure has risen since the pandemic began.
To further protect borrowers, OSFI wants to limit how many mortgages lenders can approve that exceed this limit.
Unfortunately, this means if you’re someone who is trying to maximize their home purchasing power, this new rule could limit how much home you can afford.
Stricter debt ratios for conventional mortgages
If you’ve taken out a mortgage, you’re probably already familiar with debt ratios. There are two debt ratios lenders must use. The first is the gross debt service (GDS) ratio, and the second is the total debt service (TDS) ratio.
If you’re taking out an insured mortgage where you’re putting less than 20% down, there’s no wiggle room. Your GDS ratio must fall below 39%, and your TDS ratio must fall below 44%.
However, if you’re taking out a conventional mortgage by putting at least 20% down, that’s where there’s some wiggle room. The banks can let you exceed the recommended 39% GDS and 44% TDS.
OSFI wants to clamp down further on that.
OFSI proposes further limiting the number of mortgages exceeding 39% GDS and 44% TDS. This is supposed to make lending safer for borrowers but will further restrict how many approved people exceed those ratios.
Modified Stress Test
Right now, the mortgage stress test is straightforward. Currently, you must qualify with the greater of the Bank of Canada Qualifying Rate (currently 5.25%) or your mortgage rate plus 2%. OSFI wants to change that.
OSFI is proposing that a different stress test apply depending on the product type and the length of the mortgage term borrowers are signing up for. This is mainly to address variable rate mortgage holders, who have seen their mortgage payments skyrocket after the prime rate went up 400% last year.
Although we don’t yet know the full details, it’s pretty plausible that one stress test could apply to fixed-rate mortgages while another applies to variable-rate mortgages.
Likewise, there could be one stress test for shorter-term mortgages and another for longer-term mortgages.
How the Canadian Mortgage App Can Help
It’s important to note that none of those mortgage rules are finalized. The soonest that they could come in is the springtime.
Rest assured if these new mortgage rules go ahead, the Canadian Mortgage App will be updated to reflect them. This means that you can rest easy knowing that the numbers you’re getting from the Canadian Mortgage App are accurate.