OSFI rules are intended to protect Canadians from systemic banking risks
The Office of the Superintendent of Financial Institutions (OSFI) has announced that it will be implementing stricter requirements for some types of loans to protect homeowners who are now wrestling with the added risks from mounting interest rates.
“OSFI is taking action to ensure that federally regulated financial institutions are well prepared to address the risk of persistent, outstanding consumer debt that can make lenders more vulnerable to negative economic shocks,” the agency said.
The changes will affect combined loan plans (CLPs), loans with shared equity features, and reverse mortgages.
“As their structures evolve, so too must our approach and treatment of such exposures,” OSFI explained. “The most significant concern with these products is the re-advanceability of credit above the 65% loan-to-value (LTV) limit. Products structured in this way could lead to greater persistence of outstanding balances and increase risks to lenders and households.”
While the majority of those who are using CLPs will see no changes, those who owe more than 65% LTV will be required to allocate a portion of their principal payments towards reducing their overall mortgage amount until it goes below the 65% threshold.
“This will typically happen the next time borrowers renew their CLP after the end of October or December 2023, depending on the lender’s fiscal year,” OSFI said.
Data from the Bank of Canada indicated that CLPs that are above 65% LTV currently account for $204 billion of the nation’s approximately $1.8 trillion in total outstanding residential mortgages.