Fri. Apr 12th, 2024

Limited highly leveraged mortgages

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Canadians are among the most indebted mortgage borrowers in the world.

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Office of the Superintendent of Financial Institutions to Limit Number of Highly Leveraged Loans in Mortgage Loan Portfolios residential properties of Canadian banks, according to the daily The Globe and Mail.

This type of mortgage loan has increased significantly in Canada due to the sharp increase in real estate prices that the country has experienced in recent years. Canadians are among the most indebted mortgage borrowers in the world.

In response to this situation, the Office of the Superintendent of Financial Institutions (OSFI) has told banks that they will have to limit loans to borrowers with mortgages greater than 4.5 times their annual income, according to two sources cited by The Globe and Mail.

For example, a person with an annual income of $100,000 would apply for a loan mortgage worth more than $450,000.

All loans secured by property will now be included in the loan-to-income ratio calculation. This includes second mortgages from another lender and home equity lines of credit.

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It is important to note that the new rule will only apply to new mortgages and not to existing loans or those that need to be renewed.

This limit on banks is expected to come into effect in the first quarter of 2025. It will be in addition to other mortgage qualification rules, including the stress test which requires borrowers to be able to repay their loan mortgage if the interest rates are two percentage points higher than the negotiated rate.

According to sources from the Globe and Mail< /em>, banks will however be authorized to exceed the new ratio imposed to accommodate certain customers who buy in cities where prices are very high, such as Toronto or Vancouver, for example. It is not uncommon in these cities for buyers to borrow more than 4.5 times their annual income for housing.

But lenders will also be subject to overall caps on all of their mortgage loans, which will still limit the room for maneuver they have.

Currently, Canadian banks have no limit on the number of highly leveraged loans they can hold on their books. /p>

This limit which will be imposed on Canadian banks could make access to mortgage credit even more difficult for new buyers at a time when property prices have never been so high in the country. It's already difficult for borrowers to qualify for a mortgage due to the federal stress test and rising interest rates.

Nevertheless, the proportion of highly leveraged borrowers has declined significantly in the country since peaking in early 2022. The percentage of new mortgages with an LTI ratio above 450% was 12% last year. quarter of 2023, down from 26% in the first quarter of 2022, according to Bank of Canada data.

But cracks have started to appear in the mortgage market when the Bank of Canada raised its interest rates. In January 2023, OSFI presented a plan to limit these loans. At the time, the banking regulator was considering a 25% cap on a lender's new loans each quarter, but no further details were announced.

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