The Office of the Superintendent of Financial Institutions (OSFI) announced a slight change to rules surrounding readvanceable mortgages on Tuesday.
Readvanceable mortgages, also known as Combined Loan Plans (CLP), are typically a traditional amortizing mortgage blended with a revolving line of credit.
In a statement, OSFI said it wants to be sure financial institutions are well-prepared to address the risk of persistent, outstanding consumer debt to lenders.
“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,” said OSFI Superintendent Peter Routledge in a statement. “Today, we have asked federally regulated financial institutions to make their innovative mortgage products safer and more sustainable over the long term.”
According to OECD data, Canada has the ninth-highest rate of household debt as a percentage of net disposable income compared to other major Western countries, including Spain, the UK and the U.S.
“The most significant concern with these products is the readvanceability of credit above the 65% loan-to-value (LTV) limit,” OSFI added. “Products structured in this way could lead to greater persistence of outstanding balances and increase risks to lenders and households.”
The change affects how borrowers can use a readvanceable mortgage. Currently, whenever borrowers pay down any principal, even when it’s above 65% LTV, they can immediately re-borrow that paid-down principal from the line of credit portion.
Starting in late 2023, OSFI said the principal portion of payments over 65% LTV will go towards paying down the overall debt and reducing the total readvanceable mortgage borrowing limit.
For borrowers who want a readvanceable mortgage that readvances above 65% LTV, the only option will be a non-federally regulated lender, such as a credit union.
How it all works
Robert McLister, a mortgage strategist at MortgageLogic.news, broke it down with an example.
Let’s say a homeowner bought a $200,000 house and got a re-advanceable mortgage up to 80% of the value of the home – in this case, $160,000. Today, if a homeowner decided to borrow $80,000 from a mortgage portion and $80,000 from a line of credit (LOC) portion, and made a principal payment of $250 on the mortgage portion, their available LOC credit would rise to $80,250. Basically, principal payments increase a homeowner’s available line of credit.
“Once this policy takes effect,” McLister explained, “you would not be able to do that until you pay down the total loan to value to 65%.” In other words, that homeowner would need to pay it down to $130,000.
What mortgage experts think
During a technical briefing on Tuesday morning, OSFI senior officials described the changes as a relatively modest way to alleviate the credit risk in Canada’s mortgage market without affecting monthly payments.
Mortgage experts largely concur. Ron Butler, of Butler Mortgage, described OSFI’s changes as “a nothing-burger” in an email to CMT.
“By simply reinforcing and codifying existing rules and procedures and only adding the requirement that regulated lenders adhere to a 65% maximum loan-to-value…by checking on possible home value reduction means nothing has changed,” Butler wrote.
McLister said the mortgage industry expected to see more comprehensive changes from OSFI to address concerns about homebuyers using readvanceable mortgages to speculate on properties, thereby adding further pressure to home prices, or never paying the principal down. Another was a minimum qualifying rate for variable-rate mortgages to ensure homebuyers weren’t getting into mortgages without a fixed payment limit.
“It’s a surprise that this is all they did,” McLister said of Tuesday’s announcement. “Because I think the industry expected worse.”