Vol. 151, No. 26 — December 27, 2017
Registration
SOR/2017-270 December 7, 2017
PROTECTION OF RESIDENTIAL MORTGAGE OR HYPOTHECARY INSURANCE ACT
The Minister of Finance, having consulted with the Governor of the Bank of Canada and the Superintendent of Financial Institutions, pursuant to subsection 42(1) of the Protection of Residential Mortgage or Hypothecary Insurance Act (see footnote a), makes the annexed Regulations Amending the Eligible Mortgage Loan Regulations.
Ottawa, December 4, 2017
William Francis Morneau
Minister of Finance
Regulations Amending the Eligible Mortgage Loan Regulations
Amendments
1 (1) Paragraph 5(1)(e) of the French version of the Eligible Mortgage Loan Regulations (see footnote 1) is replaced by the following:
- e) si le contrat de prêt permet des variations de la période d’amortissement en raison d’une fluctuation des taux d’intérêt pendant sa durée, le remboursement du prêt est recalculé au moins tous les cinq ans pour respecter le tableau d’amortissement original;
(2) The portion of subsection 5(2) of the Regulations before paragraph (a) is replaced by the following:
Credit score exception
(2) The criterion set out in paragraph (1)(g) does not apply if no more than 3% of the lender’s high ratio loans and low ratio loans that were approved for insurance and funded during one of the following periods were loans in respect of which no borrower or guarantor had a credit score of at least 600:
(3) The portion of subsection 5(3) of the Regulations before paragraph (a) is replaced by the following:
Debt service ratio calculations
(3) For the purposes of paragraph (1)(h), the gross debt service ratio and total debt service ratio are to be calculated using the annual payments, in respect of the loan and any other loan with an equal or prior claim against the eligible residential property, that would be required to conform to the amortization schedule agreed to by the borrower and the lender if the interest rate were the greater of
2 (1) Paragraph 6(b) of the Regulations is repealed.
(2) Paragraph 6(d) of the Regulations is amended by striking out “or” at the end of subparagraph (iii), by adding “or” at the end of subparagraph (iv) and by adding the following after subparagraph (iv):
- (v) the loan must be held or will be held in a registered retirement savings plan or a registered retirement income fund of
- (A) any partnership that does not deal at arm’s length, within the meaning of section 251 of the Income Tax Act, with the borrower, or
- (B) a connected person, as defined in subsection 4901(2) of the Income Tax Regulations, to the borrower;
(3) Section 6 of the Regulations is amended by striking out “and” at the end of paragraph (c) and by adding the following after paragraph (d):
- (e) the purpose of the loan must either
- (i) include the purchase of the eligible residential property against which it is secured, or
- (ii) be the discharge of the outstanding balance of a prior low ratio loan;
- (f) the outstanding balance of the loan at any time over the term of the loan is not to be increased to exceed the balance that would have been outstanding at that time under the lender’s original amortization schedule;
- (g) the amortization schedule is not to be extended over the term of the loan and is not to exceed
- (i) if the loan is for the purchase of the eligible residential property against which it is secured, 25 years, or
- (ii) if the loan is for the discharge of the outstanding balance of a prior low ratio loan, the lesser of 25 years and the remaining amortization period of the prior low ratio loan;
- (h) at either the time of the initial approval of the loan by a qualified mortgage lender or discharge of the outstanding balance of a prior low ratio loan by the qualified mortgage lender, the value of the eligible residential property against which it is insured must be less than $1,000,000;
- (i) if the loan agreement allows for fluctuations in the amortization period as a result of a variable rate of interest during the term of the loan, the loan payment must be recalculated at least once every five years to conform to the lender’s original amortization schedule;
- (j) at the time of the mortgage or hypothecary insurance application, at least one of its borrowers or guarantors must have a credit score that is greater than or equal to 600;
- (k) at the time of the qualified mortgage lender’s initial approval of the loan or discharge of the outstanding balance of a prior low ratio loan, as the case may be, the gross debt service ratio and total debt service ratio must not exceed 39% and 44%, respectively;
- (l) at the time of the qualified mortgage lender’s initial approval of the loan or discharge of the outstanding balance of a prior low ratio loan, as the case may be, if the eligible residential property against which the loan is secured contains only one housing unit, that unit will be occupied by the borrower or by a person related to the borrower by marriage, common-law partnership or any legal parent-child relationship; and
- (m) at the time of the mortgage or hypothecary insurance application, the loan must be reasonably likely to be repaid, having regard to the borrower’s capacity to make the loan payments while paying their other debts and meeting their other obligations over the term of the loan, based on reasonable assumptions as to what the highest loan payment over the term of the loan will be.
(4) Section 6 of the Regulations is renumbered as subsection 6(1) and is amended by adding the following:
Credit score exception
(2) The criterion specified in paragraph (1)(j) does not apply if no more than 3% of the lender’s high ratio loans and low ratio loans that were approved for insurance and funded during one of the following periods were loans in respect of which no borrower or guarantor had a credit score of at least 600:
- (a) the first four quarters of the preceding five quarters;
- (b) the first four quarters of the preceding six quarters; or
- (c) the first four quarters of the preceding seven quarters.
Debt service ratio calculations
(3) For the purpose of paragraph (1)(k), the gross debt service ratio and total debt service ratio must be calculated using the annual payments, in respect of the loan and any other loan with an equal or prior claim against the eligible residential property, that would be required to conform to the amortization schedule agreed to by the borrower and the lender if the interest rate were the greater of
- (a) the interest rate set out in the loan agreement, and
- (b) the five-year conventional mortgage interest rate, as determined weekly by the Bank of Canada, that was in effect on the Monday of the week in which the calculation is performed.
Reasonable likelihood of repayment
(4) A low ratio loan does not meet the criterion set out in paragraph (1)(m) unless the mortgage or hypothecary lender or mortgage insurer has made reasonable efforts to verify the borrower’s income and employment status or, if the borrower is self-employed, to assess the plausibility of the income reported by the borrower.
3 Section 9 of the Regulations and the heading before it are replaced by the following:
Transitional Provisions
High ratio loans
9 (1) A high ratio loan is to be governed by these Regulations as they read on October 16, 2016 if, on any day before October 17, 2016,
- (a) the mortgage insurer received a mortgage or hypothecary insurance application in respect of the loan;
- (b) the lender made a legally binding commitment to make the loan to the borrower; or
- (c) the borrower entered into a legally binding agreement of purchase and sale in respect of the eligible residential property against which the loan is secured.
Low ratio loans
(2) A low ratio loan is to be governed by these Regulations as they read on October 16, 2016
- (a) if, on any day before November 29, 2016,
- (i) the mortgage insurer received a mortgage or hypothecary insurance application in respect of the loan,
- (ii) the lender made a legally binding commitment to make the loan to the borrower, or
- (iii) the borrower entered into a legally binding agreement of purchase and sale in respect of the eligible residential property against which the loan is secured; and
- (b) if the condition referred to in paragraph (a) was met on or after October 17, 2016, the loan is funded not later than
- (i) April 30, 2017, or
- (ii) October 31, 2017, if the loan is documented as being scheduled to be funded not later than April 30, 2017 but was delayed due to unforeseen circumstances beyond the borrower’s control.
Coming into Force
4 These Regulations are deemed to have come into force on October 17, 2016.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the regulations.)
Issues
These regulatory amendments (1) adjust the eligibility criteria for high ratio mortgage insurance to require that all high ratio mortgages qualify for mortgage insurance using debt service ratios calculated at the greater of the contract interest rate set out in the loan agreement and the five-year conventional mortgage interest rate as determined by the Bank of Canada; (see footnote 2) and (2) apply the eligibility criteria for high ratio mortgage insurance to low ratio mortgage insurance.
These changes relate to the Eligible Mortgage Loan Regulations, made pursuant to the Protection of Residential Mortgage or Hypothecary Insurance Act, which apply to private mortgage insurers, and the Insurable Housing Loan Regulations, made pursuant to the National Housing Act, which apply to Canada Mortgage and Housing Corporation (CMHC).
Mortgage insurance covers two main categories of loans:
- (1) high ratio loans, which have loan-to-value ratios above 80%; and
- (2) low ratio loans, which have loan-to-value ratios of 80% or less.
Federally regulated lenders are required by legislation to insure high ratio loans at the time the loan is granted; low ratio mortgage insurance is optional and can be purchased at any time throughout the life of the loan.
Portfolio or “bulk” insurance is the most common form of low ratio mortgage insurance. Lenders pool together mortgages that are uninsured at origination and purchase default insurance on all the loans in the pool. The pools are then converted into tradeable financial assets through CMHC securitization programs and purchased by investors. Insuring and selling off pools of mortgages provides lenders a stable source of funding through which they can continue lending, thereby increasing the available amount of mortgage funding in the market.
If an insurer is unable to make insurance payouts to lenders (for insured mortgages in default), the Government backs 100% of CMHC’s mortgage insurance obligations. In order for private mortgage insurers to compete with CMHC, the Government also backs private mortgage insurers’ obligations to lenders (in the event that a private insurer is unable to make insurance payouts to lenders), subject to a deductible charged to the lender equal to 10% of the original principal loan amount.
The Government’s guarantee of mortgage insurance is intended to promote stability in the housing market, financial system and economy; support access to homeownership for creditworthy buyers; and foster lender competition. As part of its role to promote stability, and to protect the interests of taxpayers, the Government sets the eligibility rules for government-backed insured mortgages. These regulatory amendments introduce changes to the mortgage insurance eligibility rules.
These changes will help support a stable housing market over the long term and protect the interests of taxpayers. Requiring new high ratio homebuyers to qualify for mortgage insurance by applying the typically higher five-year conventional mortgage interest rate as determined by the Bank of Canada serves as a “stress test” for these homebuyers, helping to ensure that they have buffers to continue servicing their debts if economic circumstances change (for example if interest rates rise or the household’s income declines). Tighter eligibility requirements for low ratio insured loans will help bring consistency to the mortgage insurance eligibility rules and ensure that the funding support provided by low ratio mortgage insurance is directed toward low-risk lending.
Objectives
- Effective October 17, 2016, require all high ratio insured loans to qualify for mortgage insurance at the greater of the contract interest rate and the five-year conventional mortgage interest rate as determined by the Bank of Canada.
- Effective November 30, 2016, apply relevant eligibility criteria for high ratio loan insurance to low ratio loan insurance. The later implementation date for the new low ratio criteria is to give lenders time to adjust their lending and funding models to the new rules.
- Provide that, before October 17, 2016, certain high ratio and low ratio loans are grandfathered with respect to complying with the new rules to help ensure that existing or impending housing transactions are not disrupted.
- Provide that, between October 17, 2016, and November 29, 2016, low ratio loans are also exempt from the new criteria, provided they are funded by a certain date. This transition period is meant to prevent lenders from issuing mortgage pre-approvals before November 30, 2016 that they do not plan to fund in the near term.
Description
- (1) Effective October 17, 2016, all high ratio insured loans are required to qualify for mortgage insurance using debt service ratios assessed at the greater of the contract interest rate set out in the loan agreement or the five-year conventional mortgage interest rate as determined by the Bank of Canada. This requirement has been in place since 2010 for high ratio insured mortgages with variable interest rates, regardless of term, and for high ratio insured mortgages with fixed interest rates and terms less than five years.
- (2) The new qualifying rate is not to affect high ratio loans for which a mortgage insurance application, loan commitment or home purchase agreement was made before October 17, 2016.
- (3) Effective November 30, 2016, all new low ratio loans must meet the following criteria to qualify for mortgage insurance:
- (a) The purpose of the loan must include the purchase of a residential property or be the discharge of the outstanding balance of a prior loan. Mortgage refinances that increase the outstanding principal or extend the amortization period of the loan are not insurable;
- (b) The amortization period must not exceed 25 years, and the lender may not extend the amortization period;
- (c) The property value must be below $1,000,000;
- (d) For loan agreements that allow for fluctuations in the amortization period as a result of a variable rate of interest, loan payments must be recalculated at least once every five years to conform to the original amortization schedule;
- (e) The borrower or guarantor has a minimum credit score of 600;
- (f) The gross debt service ratio and total debt service ratio must not exceed 39% and 44%, respectively, calculated at the greater of the contract interest rate and the five-year conventional mortgage interest rate as determined by the Bank of Canada;
- (g) One-unit properties will be occupied by the owner; and
- (h) The loan must be reasonably likely to be repaid.
- (4) The new eligibility criteria for low ratio loan insurance are not to apply to low ratio loans for which a mortgage insurance application, loan commitment or home purchase agreement was made before October 17, 2016.
- (5) Low ratio loan agreements for which a mortgage insurance application, loan commitment or home purchase agreement was made beginning on October 17, 2016, and ending on November 29, 2016, are also exempt from the new criteria, provided they are funded by April 30, 2017 (or by October 31, 2017, if funding is delayed due to circumstances outside a borrower’s control).
“One-for-One” Rule
The “One-for-One” Rule does not apply to this proposal, as there is no change in administrative costs to business.
Small business lens
The small business lens does not apply to this proposal, as there are no costs on small business.
Consultation
The changes to eligibility criteria for high ratio and low ratio mortgage insurance were exempted from pre- publication due to their highly sensitive nature, and their potential to distort lending activity in advance of their implementation. The Minister of Finance consulted with the Governor of the Bank of Canada and the Superintendent of Financial Institutions on these changes, as required by subsection 42(1) of the Protection of Residential Mortgage or Hypothecary Insurance Act, and subsection 8.1(1) of the National Housing Act.
Following the announcement, the Department of Finance held discussions with CMHC and with private mortgage insurers for advice on drafting the regulatory amendments to implement the new policies.
Rationale
The Canadian economy faces ongoing vulnerabilities associated with elevated house prices and high household debt levels. The announced changes will improve the resiliency of the Canadian housing market, financial system and economy over the long term, while reducing taxpayers’ exposure to losses associated with potential mortgage defaults.
Requiring new high ratio homebuyers to qualify for their mortgage at the five-year conventional mortgage interest rate as determined by the Bank of Canada serves as a stress test for them and helps ensure that they have buffers so their mortgage payments remain manageable in the face of changing economic circumstances, such as a rise in interest rates or a loss of income. Tighter eligibility requirements for low ratio mortgage insurance will also help promote stability by ensuring that the funding advantages provided through this program are directed toward safe forms of lending.
Implementation, enforcement and service standards
The proposed regulations would not require any new mechanisms to ensure compliance and enforcement.
As the prudential regulator of federally regulated financial institutions, the Office of the Superintendent of Financial Institutions (OSFI) oversees private mortgage insurers’ compliance with the Eligible Mortgage Loan Regulations (made pursuant to the Protection of Residential Mortgage or Hypothecary Insurance Act). OSFI would use its existing compliance tools that may include compliance agreements and administrative monetary penalties with regard to private mortgage insurers.
CMHC reports to Parliament through the Minister of Families, Children and Social Development and is subject to the accountability framework for Crown corporations. Under the National Housing Act, the Superintendent of Financial Institutions is required to undertake examinations or inquiries to determine whether CMHC’s commercial activities are being conducted in a safe and sound manner, with due regard to its exposure to loss. The Superintendent must also report the results of any examinations or inquiries to the Government.
Contact
Elisha Ram
Director General
Capital Markets Division
Department of Finance
90 Elgin Street, 13th Floor
Ottawa, Ontario
K1P 5E9
Telephone: 613-369-3968
Fax: 613-369-3894
Email: Elisha.Ram@canada.ca
- Footnote a
S.C. 2011, c. 15, s. 20 - Footnote 1
SOR/2012-281 - Footnote 2
The Bank of Canada’s five-year conventional mortgage rate is the mode of the conventional five-year fixed mortgage interest rates advertised by Canada’s six largest banks. The rate is updated weekly and is typically higher than the contract mortgage rate that most homebuyers actually pay.