Canada’s top banking regulator is tightening the rules around a handful of real estate lending products over concerns that persistently high consumer debt levels could leave lenders more vulnerable to negative economic shocks.
In an advisory issued Tuesday, The Office of the Superintendent of Financial Institutions (OSFI) outlined regulatory expectations regarding three classes of products, most notably combined loan plans (CLPs).
“The current Canadian economic environment is riskier for regulated financial institutions given higher Canadian consumer debt loads (and) increased borrowing costs in volatile housing prices, therefore, OSFI is taking this targeted action to reduce systemic risk in the banking sector by clarifying our expectations,” senior officials said in a media briefing.
Combined loan plans, which offer a traditional amortizing mortgage along with a revolving home equity line of credit, have become the predominant uninsured real estate lending offering, the agency said.
In an op-ed published on the Financial Post website on Wednesday, Peter Routledge, the head of OSFI, said that CLPs and other innovative lending products “could pose unique risks to resilience in housing finance.”
“History teaches that housing markets are prone to bouts of over-exuberance,” Routledge wrote. “At OSFI, we lean against this tendency by promoting sound underwriting at the lenders we regulate.”
Under the new advisory, any lending above the 65 per cent loan-to-value threshold would have to be both amortizing and non-readvanceable. In other words, borrowers would see a portion of their repayments go toward reducing the outstanding debt until the combined loan fell back to the 65 per cent level.
OSFI said the changes would have no immediate effect on the way most CLP borrowers use their products and that consumers will not see an increase to their monthly payment requirements.
The changes would come into effect in late 2023.
CLPs above the 65 per cent limit account for $204 billion of the $1.8 trillion total outstanding residential mortgages as per Bank of Canada’s March 2022 data.
Robert Hogue, an economist with Royal Bank of Canada, said that while this number is far from negligible, not everyone with those types of products that will be affected.
“I suspect there will be some adjustments, but keeping in mind that this will come effective at the end of 2023, this is not a change that will affect people now. Now they will have time to adjust,” Hogue said.
The advisory noted that CLPs carry heightened risks for lenders, similar to standalone HELOCs. Amortizing all lending above the 65 per cent level would limit the extent and duration of borrower indebtedness, thereby limiting the exposure of financial institutions.
Mortgage expert Rob McLister said he did not believe the rule announcement will move the housing market in a perceptible way.
“I can’t stress enough: this is as immaterial a mortgage rule change as the housing industry could possibly hope for,” he said.
He said if borrowers still want the type of re-advancement mortgage available today, odds are they’ll be able to go to a non-federally regulated lender, such as a credit union, where they could get a fully revolving HELOC up to 80 per cent. Banks limit such products at 65 per cent.
Tuesday’s advisory also called on lenders to exhibit “heightened due diligence in respect of collateral management, property appraisal and longevity risk” when it comes to reverse mortgages and addressed uninsured mortgages with shared equity features, a relatively new form of mortgage loan.