OSFI – Who are they?

Source: Hannif Highclass c/o Genie Sabre Realty Inc.
Publish:MY BLOG: Toronto Real Estate: August 24, 2012

Office of the Superintendent of Financil Institutions Canda (OSFI) – the govering body that regulates all financil banks, credit unions, etc. has adopited under it’s “The Guideline, Residential Mortgage Underwriting Practices and Procedures” stricter mortgage lending processes. These regulations are designed to slow inflation and limit the amount of capital that potential homeowners can secure when looking to purchase a home.

Cashback down payment mortgages are on the endangered list. One of the biggest remaining lenders with a cashback down payment mortgage is Scotiabank, which announced today that it is terminating its “Free Down Payment” program, effective September 15.

A source at the bank confirms that it is scrapping the offer in light of banking regulator OSFI’s B-20 Underwriting Guidelines. OSFI has decreed that “Cashback should not be considered part of the down payment.” Most Federally regulated lenders must therefore eliminate these offerings no later than October 31, 2012. 

Cashback mortgages – essentially 100% financing – are a niche product that are seldom appropriate for owner-occupied purchases (sometimes they make sense for rentals). There are exceptions, but most of the folks who want them are simply a bit too eager to buy. 

The Canadian Association of Accredited Mortgage Professionals (CAAMP) supports OSFI’s call to end cash back products in lieu of 5% down payments. “Borrowers should have ‘skin in the game’,” it says.

There aren’t many federally-regulated lenders with 5% cashback down payment mortgages left. Last time we checked, National Bank and B2B Bank were two of the banks still doing them. Those options likely won’t be around for long.

Despite the above, banks (including Scotiabank) will continue selling cashback mortgages so long as the funds aren’t being used as equity.

Buyers sometimes use cash back for things like land transfer tax, lawyer’s fees, moving costs, closing costs, furnishings, landscaping, renovations, and so on.

Cashbacks are also used for refinances to 85% Loan-to-Value (the official refinance limit without cash back is 80% LTV on insured mortgages).

Loan-to-Value Ratio (LTV)

Loan-to-value ratio (LTV) is the amount of the mortgage loan compared to the value of the property.

This ratio is calculated by the lender prior to providing a mortgage. The results of this calculation help to determine whether or not the applicant will qualify for a loan and whether the application, if approved, will be for a conventional loan or a high ratio loan.

Here is an example. Assume:

Property Value = $100,000
Down Payment = $10,000

In this case the LTV = 90%

The calculation used is simple: 1 – (down payment / property value)

Or in our example: 1 – ($10,000 / $100,000)

(Source: CAAMP)