Mortgage industry sees amortization loophole in OSFI's new stress test rules

Mortgage industry experts are pointing out that OSFI didn't regulate the length of the amortization used in the qualifying calculation

New rules designed to ensure that homebuyers in the uninsured mortgage market can withstand rising interest rates contain a loophole that lenders could exploit to qualify more mortgages, according to industry sources.

In guidelines published Tuesday, the Office of the Superintendent of Financial Institutions pushed ahead with plans to force low-ratio borrowers — consumers with down payments of 20 per cent or more — to qualify based on the higher of the Bank of Canada five-year posted rate or two percentage points above their contract. All else being equal, both measures mean that consumers ultimately should qualify for smaller loans.

But mortgage industry experts are now pointing out that OSFI did not regulate the length of the amortization used in the qualifying calculation, which involves ensuring that only a certain percentage of your monthly household income be dedicated to housing costs.

A longer amortization period reduces the monthly payment at a given interest rate, meaning loan providers could extend amortizations from 25 to 35 years, potentially create a smaller monthly payment that would qualify more buyers.

“You can increase the amortization and clearly you can go longer,” said a source, adding he didn’t expect the major banks to take advantage of the loophole. “This was done to release some of the pressure (from increased stress testing).”

The real estate industry had been lobbying heavily for some last minute changes and OSFI said it received more than 200 submissions from federally regulated financial institutions, financial industry associations, other organizations active in the mortgage market, as well as the general public.

A report from Toronto-Dominion Bank said the stress test will likely further slow housing activity, depressing demand by five per cent to 10 per cent once implemented on Jan. 1, 2018.

The amortization change could mitigate the impact. Rob McLister, founder of says the crackdown is close to a wash if lenders use the loophole.

Assuming you’re making $60,000 a year, have no debt and 20 per cent down, based on a stress test of the contract rate plus 200 basis points, consumers now qualify for 18 per cent less loan, said McLister. But increasing amortization from 25 years to 30 qualifies you can buy roughly 10 per cent more house. Jumping from 25 to 35 amortization gets you to 18 per cent more house, he says.

“There would be higher interest rates for those products,” McLister noted. “We already see more risk-based pricing.”

In an emailed response, OSFI officials noted banks can’t qualify borrowers using any amortization, but rather the contractual amortization of the mortgage. “While OSFI has not included specific references to a qualification amortization rate in its final guideline, we will be monitoring FRFIs’ (federally regulated financial institutions’) practices as the guideline is implemented,” said the official, referring to the measures known as B-20.

Vince Gaetano, a principal at Monster Mortgage, said lenders will have to change their policy and procedures to take advantage of the 35-year amortization. “It will be interesting to see if lenders do this,” said Gaetano. “I wonder if they do that it might attract OSFI to audit them. It’s a dare. Do you want to be staged like Home Trust and be in the limelight with all the lights on you?”

Another question that remains unanswered following the changes from OSFI is whether credit unions, not regulated federally, will simply ignore the OSFI guidelines or whether provincial bodies will match them.

“Meridian is carefully reviewing the recently announced amendments to the federal banking regulator’s B-20 guideline to assess how they may impact our lending policies moving into 2018,” said Bill Whyte, senior vice-president and chief member experience officer with Meridian, which is the largest credit union in Ontario. “The B-20 guideline does not technically apply to our business. However, Meridian will consider that guideline as we are a prudent and responsible lender with a strong balance sheet. Our primary goal is to have our members’ backs by ensuring they are well-informed about all the financial aspects of homeownership and home affordability.”