Canadian Regulators through the OSFI (Office of the Superintended of Financial Institutions) are now aiming their axe on equity lending. That is, they want to end this type of lending citing that it’s riskier on banks.
Mortgage loans issued this way allow lenders to overlook the income capacity of borrowers, as it means the accumulated equity amount on the property is enough of a collateral. Is equity lending popular? That’s a yes. In 2017 alone 1 in every 5 loans taken, used equity as the basis for funding, not counting private lending where it is most popular.
Home Equity Lending
Borrowers who happen to be in a financial fix that does not allow them to take an additional loan have been the biggest beneficiary of equity lending. That is, instead of focusing on your income, all you need to have a refinancing, is a substantial equity on the property’s value (at least 35% and above) and you are qualified.
With that amount of the property value at hand, the bank or lending party assumes you are a low risk to them! Your income might be way too low, but still you a considered safe to deal with if you have good equity.
What a simplified way of lending to folks with wads of cash, right. This, in other words, means you can present cash equivalent to 35% of the property’s value to the lender and boom you are approved to be the homeowner or your mortgage will be approved. No more questioning on income capacity to service the loan and so on.
OSFI Plans to Wipeout Equity Lending
Now, according to one of the OSFI’s letters to the industry, the regulators want to scrap of equity lending soon. Off cause that would only affect the lending institutions controlled by them, but to private lenders, this would be seen as a growth.
Since launching the B-20 guideline, OSFI believes that the number of people considering equity lending has been on the decline. In July 2017, 1 in 5 loans relied on equity other than income, but exactly the same period this year the numbers came to 1.4 in 10 loans against equity. Although the trend is still there,ut the growth is super slow.
The move to cut off this form of lending doesn’t off cause sound good on potential homebuyers, but the regulator’s take is that they are after setting things right on the institutions they oversee. That means if you’ve been planning to get this kind of loan, perhaps it’s time to grab one before OSFI’s axe falls.