Mortgage rules to tighten for both individuals and financial institutions

By Andrew Rickard | December 15 2015 11:37AM

Last week, the federal government and the Office of the Superintendent of Financial Institutions (OSFI) both announced plans to tighten rules related to residential mortgages.

On Dec. 11, Finance Minister Bill Morneau announced that, effective Feb. 15, 2016, the minimum down payment for government-insured mortgages will increase from 5% to 10% for the portion of the house price above $500,000.

“The Government’s role in housing is to set and maintain a framework that is equitable, stable and sustainable. The actions taken today prudently address emerging vulnerabilities in certain housing markets, while not overburdening other regions,” said Morneau. “This measure will increase homeowner equity, which plays a key role in maintaining a stable and secure housing market and economy over the long term. It also protects all homeowners, including many middle class Canadians whose greatest investment is in their homes.”

On the same date, OSFI announced plans to update its capital requirements for residential mortgages. The regulator noted that household debt continues to grow faster than income, and that housing prices in some markets are still rising rapidly. In this kind of environment, it wants to make certain that financial institutions can absorb "severe but plausible losses".

"The potential severity of loss scenarios in the residential mortgage market depends crucially on price developments. In particular, potential losses become more severe during extended periods where house prices have recently risen rapidly and/or are high relative to borrower incomes. As a result, the potential severity of losses may vary across Canada," reads the statement from OSFI.

The regulator says it will follow its usual practice and consult with financial institutions and other stakeholders before making any changes. An initial consultation with the industry will be followed by broader public consultation in 2016, and the final rules are expected to be in place by no later than 2017.