Weekly Digest

———

March 28th, 2024

OSFI to Implement a Loan-To-Income Limit (LTI)

A major change is coming to the mortgage market, and more restrictions for debt and leverage are being added. OSFI will soon implement a Loan To Income (LTI) limit on banks portfolios and future applications.

This measure means that institutions, in any quarter, can only have a certain percentage of their mortgages in excess of 4.5x loan to income ratio. The exception limit is not known at this time.

Lets assume a family earns $200,000 household income with no debts, and a perfect credit rating.

• New proposed Loan to Income Limit would be $200,000 x 4.5 = $900,000 max mortgage

• Current mortgage approval with debt servicing exceptions would be a $1,100,000 max mortgage.

  • Keep in mind that these clients are being stress tested in today market at 7.29%. When the rates drop, to say 3.75% and clients stress test at 5.75%, they would qualify for $1,225,000.

This is a massive change for new borrowers.

As we await further details, it will still be possible to get a mortgage for over 4.5x income but the the borrower will need to:

• Be a better-qualified customer than the average borrower so the bank will grant an exception.

• Potentially pay a rate premium if your mortgage is above 4.5x income.

• Go to a non-prime lender’s with higher LTI limits.

It’s important to note, however, that many borrowers in a bank portfolio will have mortgages well below the 4.5x limit, including existing clients who are well into their amortizations. This will help the overall portfolio for the lender, and enable them to grant more new business clients the exceptions to LTI ratios.

In the GTA and for most of our clients, we are approving individuals for much higher than 4.5x their incomes. Especially in Lorne Park, Port Credit, Toronto, etc.

Currently, the average loan to income in Canada is 2.6x income.

Some questions that have already been tabled, and OSFI has provided clarity are below;

1. Will Loan to Income be based on the entire borrower’s real estate portfolio OR just the subject property.

• • It is based on the subject property only.

  • If clients have other properties with mortgages, it will not be factored into the LTI calculation.

2. Will lenders still be able to use income exceptions on the file, which would improve the 4.5x income calculations?

1. • Yes. The LTI will not change how income is calculated.

3. Will the LTI test apply to borrowers like the rate qualifying stress test?

• The portfolio test will track the banks’ uninsured mortgage portfolios. “This measure doesn’t apply to any one person, ”OSFI said in a March 22 statement. “It applies to the institution’s portfolio of underwritten mortgages that originate that quarter … and needs to be managed by the institution.”

• There is no technical prohibition on an individual taking on a mortgage if the loan exceeds their income by more than 4.5 times, however; so long as the entire portfolio averaged 4.5 times or less. So if the banks take on too many highly leveraged loans, they will need to scale back which directly impacts the consumer.

Bank of Canada Declares Productivity Emergency

Bank of Canada has urged businesses to boost investments to increase overall productivity, warning that Canada is in the midst of a productivity crisis. Before the last quarter of 2023, Canada’s productivity had declined for six straight quarters, falling well behind other G7 countries.

Business owners would argue, its hard to increase productivity if rates are so elevated?

Federal Government Aiming To Shrink Population

The government’s plan to cut temporary resident numbers from 2025 to 2027 will result in the weakest three years for population growth in Canada’s 157-year history.

Although Canada has always been welcoming of immigrants, the current pressure on housing and public services has made it a key election issue. Immigration Minister Marc Miller announced last week that the government plans to bring the share of temporary residents down to 5.0% of the total population over the next three years. Miller cited 2,500,000 as the current number of temporary residents, or 6.2% of the population.

This will amount to an annual decline of the non-permanent resident population by 150,000 to 200,000 a year.

This population cutback helps, but we still have a large housing imbalance. CMHC has stated Canada still needs to build an extra 3,100,000 homes (on top of what it normally builds) to catch up to demand.

Canada’s Population Hits 41,000,000

There are now 41,000,000 people living in Canada, per Stat Can’s real-time population model. This milestone coincided with new numbers from Stat Can showing that the country grew by 1.3 million in 2023, the fastest annual pace since 1957. Almost all the growth was driven by immigration, not net births.

Rent vs Buy?

Homeowners generally have a four times higher net worth than those who rent.

Current Interest Rates

CONVENTIONAL

• 5 year fixed, 30 yr amortization – 5.09%

• 3 year fixed, 30 yr amortization – 5.29%

• 2 year fixed, 30 yr amortization – 6.00%

• 5 year variable, 30 yr amortization – Prime – 0.80% = 6.40%

• 5 year fixed, 25 yr amortization – 4.99%

• 3 year fixed, 25 yr amortization – 5.19%

• 2 year fixed, 25 yr amortization – 5.90%

• 5 year variable, 25 yr amortization – Prime – 0.90% = 6.30%

INSURED

• 5 year fixed, 25 yr amortization – 4.89%

• 4 year fixed, 25 yr amortization – 4.89%

• 3 year fixed, 25 yr amortization – 4.99%

• 5 year variable, 25 yr amortization – Prime – .90% = 6.30%

Fast Facts

• 232 – CRA employees who have been fired for falsely claiming the $2,000 monthly federal COVID-19 benefit. They must all repay the loans if they haven’t already.

• $718,750 USD – The auction price for the floating piece of wood that Kate Winslet’s character Rose clung to near the end of Titanic.