Changes to the mortgage rules may have gone too far.
Just when we think, when we are told, that the mortgage regulation pause button has been hit, we see the Bank of Canada (BOC) increase its overnight rate by 25 bps, OSFI released a new discussion paper, including a recommendation to qualify all borrowers at 200 bps above the contract rate, and proposed changes to close a number of tax 'loopholes', all of which may have considerable impact to our livelihoods. Add to that the ongoing discussion about introducing Risk Sharing in 2018 and a number of us are saying "enough already!"
In terms of the Bank of Canada 25 basis point increase there may be another in the Fall. In 2015 when the price of oil plummeted the Bank of Canada decreased the overnight rate by 50 bps. Even though the banks only passed 30 of those 50 basis points along to consumers, the Bank of Canada essentially has a "free" 50 bps to play with. Notwithstanding mixed growth data, a Canadian dollar that has appreciated approximately 10% this year and inflation data that suggests we remain at the bottom end of the tolerance levels, there is essentially another 25 bps of rate yet to recapture.
The Office of the Superintendent of Financial Institutions (OSFI) is proposing changes that align with their July 16 announcement and strengthen the expectations they have in a number of specific areas including:
- Requiring a stress test for all uninsured mortgages of at least 2% above the contract rate
- Requiring that Loan to Value measurements remain dynamic and adjust for local market conditions where they are used as a risk control, such as for qualifying borrowers
- Expressly prohibiting co-lending arrangements that are designed, or appear to be designed to circumvent regulatory requirements
We, in the mortgage brokerage industry, have repeatedly made the following requests:
- Don't make any more changes without proper consultation and data to support.
- Allow refinances back into portfolio insurance. Make the Loan-to-Value limit 75% instead of 80% if they really consider it risky business. This would be especially important if further regulations were introduced to qualify conventional purchasers at a benchmark rate as it would slow down purchase activity leading to people staying in their houses longer and likely seeking to renovate and improve them instead of moving.
- Uncouple the stress test from the benchmark rate (currently at 4.84%) and set it using an agnostic measure. The difference between the 5 and 10-year bond yields could be used as a proxy with a floor set to 75 points. Create safeguards for clients who qualified under the previous rules to be able to port, renew or refinance based on qualifying at the contract rate.
- Apply the newly adjusted stress test to all mortgage applications. This will allow for industry competition among channels and among lenders. Keep in mind that OSFI's mandate is to ensure the solvency of the financial institutions for which it regulates. If it there is separate qualifying criteria between high and low ratio loans then it may incent people to 'cheat' with their down payments to end up in a low ratio bucket but thereby adding risk to banks balance sheets.
Changes to close 'loopholes' for 'income sprinkling' and 'passive investments' could potentially be the biggest changes to our tax system since the introduction of capital gains more than 40 years ago. The mortgage industry's association, Mortgage Professionals Canada, is consulting with other national industry associations.
We at TMG are consulting with tax experts so that we have the opportunity to recommend a course of potential action.
What I can say and what I have seen is that a lot of collective voices are definitely more meaningful than a sporadic few.