The federal government has announced further restrictions that will make
it more difficult for some borrowers to get mortgage loans and make
it more costly for foreigners to speculate in the real estate
Under current rules, a federally regulated mortgage lender may
not make a loan on the security of a residential property if the
value of the loan exceeds 80% of the value of the property, unless
the loan is insured by an approved insurer. Currently, the approved
insurers are the Canada Mortgage and Housing Corporation and two
private insurers that are backstopped by the government. The new
rules will prevent these insurers from insuring certain loans,
which will directly impact the ability of the lenders to offer the
With respect to high ratio loans (those that have a loan to vale
ratio greater than 80%), going forward, for a loan to be eligible
for insurance the borrower must be able to qualify for the loan at
the greater of the contracted interest rate and the Bank of Canada
posted five year fixed interest rate. As the five-year rate tends
to be higher than the rates for lesser maturities, this may exclude
some borrowers from obtaining financing. The rules also stipulate
the maximum gross and total debt service ratios that may be used
for the purposes of making the eligibility assessment. The rates
are set at 39 percent and 44 percent, respectively.
While low ratio loans need not be individually insured, lenders
often obtain insurance on a portfolio of these loans in order to
qualify them for sale to a government sponsored securitization
program. The new rules impose eligibility requirements for
mortgages covered by portfolio insurance that are similar to those
that apply to high ratio mortgages, namely:
A maximum amortization length of 25
A maximum property purchase price
below $1,000,000 at the time the loan is approved
For variable-rate loans that allow
fluctuations in the amortization period, loan payments that are
recalculated at least once every five years to conform to the
original amortization schedule
A minimum credit score of 600 at the
time the loan is approved
A maximum gross and total debt
service ratios of 39 percent and 44 percent at the time the loan is
approved, calculated by applying the greater of the mortgage
contract rate or the Bank of Canada conventional five-year fixed
A property that will be
The new high and low ratio requirements are subject to phase in
rules but will be fully in effect by October 17, 2016 and November
30, 2016, respectively.
Lender risk sharing
The government also announced that it intends to launch a
consultation on the existing regime where the government takes on
100% of the risk relating to an insured mortgage. In particular,
the consultation will seek comment on introducing a modest level of
lender risk sharing. The consultation is to be launched sometime
this fall at an unspecified date.
The government also indicated that it will address what it
considers to be a misuse of the personal residence exemption for
gains made on the sale of an individual's personal residence.
The new rules will ensure that the exemption is only available to
Canadian residents by requiring that the individual be resident in
Canada in the year the individual acquired a residence in order to
claim the exemption in that year.
Similarly, the rules respecting trusts will also be tightened to
ensure that families are able to designate only one property as the
family's principal residence for any given year.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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