Bank regulator beefs up rules for some types of home loans

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

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

The biggest change targets so-called combined loans, which are conventional mortgage loans paired with revolving lines of creditHELOCs are home owner loans that homeowners can access as they please, without having to pay any fees.

The new regulations will kick in once a readvanceable loan exceeds 65 per cent of the underlying home’s value. Currently, an owner may borrow up to 80 percent on a loan like this. However, the new rules will reduce that limit to 65 percent by requiring the borrower to pay some of the principal if they exceed that limit.

If that happens, the change will make it so that once the loan’s value exceeds 65 per cent of the home, the loan “will operate more like a traditional mortgage where the borrower makes principal and interest payments until the [loan gets back below] 65 per cent,” an official told CBC News at a technical briefing.

The new rules won’t be in force until late 2023, but OSFI says that as things stand now, data from the Bank of Canada suggests there’s $200 billion worth of HELOC that is currently outside of that 65 per cent threshold. This is a portion of $1.8 trillion in total housing debt.

This change will not result in an increase in monthly payments for consumers, according to the official saidThese changes will not affect new home buyers.

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Changes to shared equity and reverse mortgages

The regulator is also changing the rules for reverse mortgages as well as shared equity mortgages. In exchange for an equity stake, shared equity mortgages allow home buyers to partner with third parties to raise cash for a downpayment.

The federal government rolled out a government-backed shared equity loan program in 2019, and non-profit and other community groups have since rolled out a version of them. OSFI’s announcement on Tuesday isn’t a new rule change so much as it is a clarification of existing requirements: that such products must in fact be legitimate equity stakes — not simply another loan — and that they must be “on equal footing with the borrower’s equity,” the official said.

The final announcement governs so-called reverse mortgages, which allow home owners to access the equity in their homes up front, without having to sell. These loans have seen a surge in popularity in recent years due to the fact that they don’t require repayment of any portion of the loan until the owner sells. 

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