Banking regulator tightens rules for certain types of home loans

Canada’s top banking regulator is changing rules that cover certain types of home loans to ensure lenders and borrowers are able to meet their obligations at a time when the country’s housing market appears vulnerable.

The Office of the Superintendent of Financial Institutions (OFSI) is implementing new guidelines for certain types of home loans, including equity mortgages, reverse mortgages, and conventional mortgages paired with revolving lines of credit.

The biggest change is to so-called blended loans, which are conventional mortgages paired with revolving lines of credit called HELOCs that homeowners can draw on as they see fit, without being obligated to repay that portion on any schedule.

The new regulations will come into effect once a repayable loan exceeds 65% of the home’s underlying value. Currently, a homeowner can technically borrow up to 80% on such a loan, but the new rules will functionally lower that cap to 65% by requiring the borrower to start repaying some of the principal if they exceed that line.

If that happens, the change will ensure that once the loan value exceeds 65% of the home, the loan will “work more like a traditional mortgage where the borrower pays principal and interest until the [loan gets back below] 65%,” an official told CBC News during a technical briefing.

The new rules won’t come into effect until the end of 2023, but OSFI says that, as things stand, Bank of Canada data suggests there’s $200 billion of HELOC that are currently outside this 65% threshold. That’s over $1.8 trillion of total housing debt.

Consumers won’t see an increase in their monthly payment requirements as a result of this change, the official said, and the changes won’t impact new homebuyers.

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Changes to Shared Shares and Reverse Mortgages

The regulator is also changing the rules for participating mortgages and reverse mortgages. Shared equity mortgages are programs that pair homebuyers with third parties to help them find money for a down payment, in exchange for equity participation.

The federal government launched a government-backed crowdlending program in 2019, and nonprofits and other community groups have since rolled out a version of it. OSFI’s announcement on Tuesday is not so much a new rule change as a clarification of existing requirements: that these products must in fact be legitimate equity interests — not just another loan — and that they must be “on an equal footing with the interests of the borrower”. fairness,” the official said.

The final announcement governs so-called reverse mortgages, which allow homeowners to access their home’s equity in advance, without having to sell. These loans have exploded in popularity in recent years, largely because they typically don’t require part of the loan to be repaid until the homeowner decides to sell.

The new guideline caps the amount a homeowner can take out on a reverse mortgage at 65% at origination.

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