Canadian regulator tightens rules for riskier mortgage products
2022.06.28 21:36
A for sale sign is displayed outside a home in Toronto, Ontario in Toronto, Ontario, Canada December 13, 2021. REUTERS/Carlos Osorio
TORONTO (Reuters) – Canada’s financial regulator said on Tuesday it would tighten rules for riskier home loan products, in a bid to address concern over high levels of mortgage debt driven by record-low interest rates during the pandemic.
The Office of the Superintendent of Financial Institutions (OSFI) said the rules go into effect from the end of the fiscal year in 2023 and were designed to ensure that financial institutions are “well prepared to address the risk of persistent, outstanding consumer debt.”
With borrowing costs rising fast, OSFI said in April that a housing market downturn is among the biggest risks facing Canada’s financial system this year.
Under the new rules, the OSFI extended the application of existing limits on home equity lines of credit to non-traditional mortgage products.
These include combined loan plans (CLPs), which blend a traditional mortgage with a revolving line of credit, and mortgages with shared equity features, in which the borrower and an equity investment provider jointly make a downpayment to buy a home.
CLPs “amplify the risk associated with persistent, outstanding borrower debt,” OSFI said in an advisory to financial institutions.
It said that lending over 65% of the home’s value must have payments that directly reduce the principal and cannot be lent out again.
Those who owe more than 65% of their home values will have a period where part of their principal payments go to gradually reducing the mortgage amount to below this level, it said.
CLPs above 65% of loan-to-value accounted for 11% of all residential mortgages as of March 2022, and the changes will not affect most borrowers, OSFI said.
On mortgages with shared equity features, financial institutions must ensure that their mortgages have priority over all other claims in the event of a foreclosure, the regulator said.
The financial institution must also ensure that the equity partner’s contribution is a true equity investment, the regulator said.
