NEWS

The Office of the Superintendent of Financial Institutions (OSFI) announced changes to mortgage financing as they take action to reduce systemic banking system risk. On June 28, 2022, OSFI explained that they need to ensure that federally regulated financial institutions are well prepared to address persistent risk of outstanding consumer debt. The action they are taking is outlined in their Annual Risk Outlook 2022-2023. The announced changes are focused on Combined Loan Plans (CLP), Shared Equity Mortgages and Reverse Mortgages.

Combined Loan Plans, also known as “CLP” are mortgage products that have a re-advanceable component to the mortgage. An example of this type of mortgage is an amortized mortgage (fixed or variable) that also has a Line of Credit component to it as well, such as a HELOC). These types of mortgages in the market allow credit to be re-advanced via the line of credit portion as the principal declines, even when the balance is over 65%. OSFI has announced that the change will force the principal amount of the payments to be applied to the reduction of the mortgage balance over 65% which will reduce the borrowing limit on the re-advanceable amount of the mortgage.

Shared Equity Mortgages are programs that pair home buyers with third parties to help them come up with cash for a down payment, in exchange for an equity stake in the property being purchased. The Canadian Government came out with such a program back in 2019 known as the First-Time Home Buyer Incentive Program and shortly after, several non-profit and community groups have rolled out their versions of the program. OSFI’s announcement was simply clarifying that these programs must be legitimate equity stakes and not simply another loan. They must be on equal footing with the buyer’s equity stake.

Reverse Mortgages are programs that enable qualifying home owners to access existing equity in their homes without having to sell and not necessarily having to pay regular mortgage payments though interest is charged so the overall equity can disappear over time. OSFI’s announcement pins a new cap on the amount the home owner can take out to 65% of the property value at the date or origin of the mortgage.

Quote

“OSFI is continuously monitoring the economic environment for a range of vulnerabilities that could pose a risk to the health of Canada’s financial system. Today, we have asked federally regulated financial institutions to make their innovative mortgage products safer and more sustainable over the long term. We are confident that our actions today will contribute to the continued resilience of Canada’s residential mortgage lending industry, and in turn of our financial system.”

- Peter Routledge, Superintendent

These changes are scheduled to take effect in late 2023 as the lender’s fiscal year comes to an end.

Source: OSFI Media Release, Canadian Mortgage Trends, BNN Bloomberg & CBC News