Canadian regulator tightens rules for riskier mortgage products

A for sale sign is displayed outside a house in Toronto, Ontario in Toronto, Ontario, Canada December 13, 2021. REUTERS/Carlos Osorio

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TORONTO, June 28 (Reuters) – Canada’s financial regulator said on Tuesday it would tighten rules for riskier home loan products, in a bid to address concerns over high levels of mortgage debt due to rising interest rates. historically low interest during the pandemic.

The Office of the Superintendent of Financial Institutions (OSFI) said the rules will come into effect from the end of the financial year in 2023 and were designed to ensure that financial institutions are “well prepared to deal with debt risk persistent and unpaid consumption”.

With borrowing costs rising rapidly, OSFI said in April that a slowdown in the housing market was among the biggest risks facing the Canadian financial system this year.

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Under the new rules, OSFI has extended the application of existing limits on home equity lines of credit to non-traditional mortgage products.

These include Combined Loan Plans (CLPs), which combine a traditional mortgage with a revolving line of credit, and mortgages with shared equity features, in which the borrower and an equity investment provider jointly pay a down payment to buy a house.

CLPs “magnify the risk associated with borrowers’ persistent and unpaid debt,” OSFI said in a notice to financial institutions.

He said lending more than 65% of the home’s value must have payments that directly reduce the principal and cannot be re-lent.

Those who owe more than 65% of their home’s value will have a period during which part of their principal repayments will be used to gradually reduce the amount of the mortgage below that level, he said.

CLPs above 65% of the loan-to-value ratio accounted for 11% of all residential mortgages in March 2022, and the changes will not affect most borrowers, OSFI said.

When it comes to equity mortgages, financial institutions must ensure that their mortgages take priority over all other claims in the event of foreclosure, the regulator said.

The financial institution must also ensure that the associate’s contribution is a genuine capital investment, the regulator said.

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Reporting by Nichola Saminather, editing by Deepa Babington

Our standards: The Thomson Reuters Trust Principles.

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