OTTAWA ─ June 28, 2022 ─ Office of the Superintendent of Financial Institutions
The Office of the Superintendent of Financial Institutions (OSFI) released a new Advisory (Clarification on the Treatment of Innovative Real Estate Secured Lending Products under Guideline B-20). The Advisory complements existing expectations under Guideline B-20, which articulates OSFI’s expectations regarding underwriting practices and procedures for reverse residential mortgages, residential mortgages with shared equity features and combined loan plans.
As shared in its Annual Risk Outlook (2022-23), OSFI is taking action to ensure that federally regulated financial institutions are well prepared to address the risk of persistent, outstanding consumer debt that can make lenders more vulnerable to negative economic shocks. Accordingly, this Advisory outlines regulatory expectations with respect to Combined Loan Plans (CLPs), loans with shared equity features, and reverse mortgages.
CLPs are an innovative product that have become the predominant uninsured real estate secured lending (RESL) offering, and they can provide great value to Canadians. As their structures evolve, so too must our approach and treatment of such exposures. The most significant concern with these products is the re-advanceability of credit above the 65 percent Loan-to-Value (LTV) limit. Products structured in this way could lead to greater persistence of outstanding balances and increase risks to lenders and households.
For most borrowers using CLPs, these changes will have no effect on the way that they use their products. For those who owe more than 65 percent LTV, there will be a gradual period where a portion of their principal payments will go towards reducing their overall mortgage amount until it is below 65 percent of its original loan to value and not be re-advanceable. This will typically happen the next time borrowers renew their CLP after the end of October or December 2023 depending on the lender’s fiscal year.
Sound mortgage underwriting remains the cornerstone of a healthy residential mortgage lending industry. We are confident that our actions today are responsible, fit for purpose and contribute to its continued resilience. By acting prudently, making evidence-based decisions, engaging with regulatory partners, and being clear about our expectations of lenders, OSFI is building a foundation of stability regardless of what lies ahead.
“OSFI is continuously monitoring the economic environment for a range of vulnerabilities that could pose a risk to the health of Canada’s financial system. Today, we have asked federally regulated financial institutions to make their innovative mortgage products safer and more sustainable over the long term. We are confident that our actions today will contribute to the continued resilience of Canada’s residential mortgage lending industry, and in turn of our financial system.”
– Peter Routledge, Superintendent
- Consumers will not see an increase to their monthly payment requirements as a result of this change.
- This action will not impact new homebuyers.
- Uninsured real estate secured lending (RESL) offering refers to residential mortgages with a 20 percent down payment or more.
- Combined Loan Plans (CLP) are typically a traditional, amortizing mortgage loan blended with a revolving line of credit.
- As of March 2022, CLPs that are above 65% LTV account for $204Bn of the $1.8Tn total outstanding residential mortgages as per Bank of Canada data.
- In the case where a borrower has exceeded the 65% LTV ratio, a portion of that principal payment will be required to go towards principal repayment, gradually reducing the overall CLP borrowing limit to the 65% LTV threshold.
- The implementation date for federally-regulated lenders with October 31st Fiscal Year End will be October 31, 2023. For federally-regulated lenders with December 31st Fiscal Year End, the implementation date will be December 31, 2023. Consumers with CLPs will not see a change to their product structure until their next renewal after these dates.
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