The Effects of More Stringent Mortgage Rules

Canadian home sales have fallen due to the tougher mortgage qualification rules that have deterred prospective buyers. The real estate market tightened its regulations in an attempt to make certain that buyers will be able to sustain potential fluctuations in their economic standing. This may be in terms of interest rate volatility, should their interest rates surpass that of their mortgage rate, as well as the amount of debt that they will incur when purchasing a property.

The Bank of Canada worries about highly indebted households and wants to provide security to the banks so that they can minimize lending risks. Other policies that have been put in place include the taxation on foreign buyers, which was implemented to hedge the continuously increasing prices on homes. Canadians are now required to undergo a stress test when getting, renewing, or refinancing a mortgage. The federal guidelines essentially require that all federally regulated financial institutions strictly assess applications. Borrowers will only qualify if their rate is equal to the Bank of Canada’s five-year benchmark rate, or two percentage points higher than their contractual rate.

As a result, it has become harder to qualify for a mortgage from traditional institutions. This has heavily impacted the housing markets across Canada, but many claim that these measures were implemented in order to control the Vancouver and Toronto markets. Unfortunately, those outside the Vancouver and Toronto areas are experiencing collateral damage due to the new restrictions. The regulatory process is a struggle that the federal government faces because it wants to impose consistent rules throughout the country, but each city possesses differing markets. These regulations most heavily affect those who want to refinance their homes. Additionally, they will be most relevant to those who wish to change financial institutions when renewing their mortgage because they will be required to re-qualify.

In order to avoid these regulations, some have resorted to finding alternative means to financing their homes. Private lenders, for instance, have become more sought out as they are not federally regulated. They only require that the property has equity rather than assess an individual’s income and ability to pay. In turn, borrowers may believe that higher interest rates and fees may be worth it in order to leverage their property for equity. Consequently, the risk that the regulations were supposed to hedge in the first place have not been reduced, but simply transferred over to another market. This market consists of the non-bank lenders, including private investors and credit unions.

Implementing these mortgage rules have lead to increased risks for lawyers because their legal insurers do not cover claims or losses incurred by private lenders. Thus, lawyers must now be more careful when assessing their clients. If they are certain that they understand the goals and intentions of their clients, then lawyers are usually able to safely act for private lenders.