All About OSFI’s New Rental Guidelines

A couple of weeks ago, OSFI threw mortgage advisors and the industry for a loop with its guidance at “Industry Day:”

“For Borrowers with multiple mortgages, the income used for the borrower income criterion should not include income used to validate the borrower’s ability to service mortgages on other properties.”

So does this mean that none of the borrower’s income can be used to qualify for a subsequent mortgage on an income-producing property (rental), if that borrower already has a primary mortgage?

No…

OSFI has clarified that there are no underwriting implications of this change.

What this change has provided for is that OSFI wants to know the income-producing residential real estate exposures for all lenders it regulates.

In the back end of the lender’s books, a loan is deemed “income producing” if 50%+ of the income used to qualify it comes from the property itself (after stripping out income already used to qualify other mortgages).

OSFI continues to say:

“Specifically, a property that is classified as materially dependent on cash flows generated by the property for capital purposes means that the mortgage relies heavily on money generated by the property itself (such as rental income),” OSFI says. “The ramifications are that the lender needs to hold more capital to protect against potential losses.”

In the end, lenders will have to hold more capital in reserves when they lend money to rental properties. And holding more money isn’t free… If lenders have to set aside more money on a particular loan category (e.g. investment properties), that potentially means higher interest rates or even tighter lending criteria on those mortgages. So yes, capital changes can indirectly affect underwriting appetite.

So What Does This All Mean?

Banks will have to hold more capital for investment properties where the income used to qualify the mortgage is derived primarily from rental income.

This increase in capital means that less money can be lent out, meaning lower returns on capital. In order to get the same returns, lenders would have to increase their interest rates.

At this time, most lenders already have increased rates on rental properties… but there are still some that do not (RBC for instance). It’s possible that RBC will have to start charging more for rental properties going forward. Furthermore, some lenders may increase their rates even more on rental properties than they already do. It’s even possible that for very leveraged clients, a lender may balk at doing the loan at all but I suspect this is going to be a very rare occurrence.