In a heavily regulated industry such as alternative lending, additional regulations or more stringent rules handed down by Canada's Office of the Superintendant of Financial Institutions (OSFI), rules which are anticipated to be fully laid out at the end of this month and implemented as soon as December of this year.
The proposed mortgage rules would require borrowers to comply with much stricter stress test scenarios, essentially requiring borrowers to qualify for a mortgage rate 200 basis points (bps) or 2% higher than at current levels.
These new proposed regulations come after a number of studies were done which showed a significant percentage of Canadians would have difficulty making their mortgage payments should interest rates rise just 100 basis points (1%).
What the ultimate impact of these regulations will be on Canadian financial institutions will be remains to be seen; however, it has generally been accepted that smaller independent alternative lenders will likely feel the brunt of these new measures, as the financial institutions which serve borrowers which may be considered "on the brink" by the large Canadian banks will likely be impacted in terms of mortgage originations as a large percentage of the potential borrowers for alternative banks are likely to be ruled out by these new regulations.
This announcement comes in the wake of a series of significant headwinds for Canadian alternative lenders such as Home Capital Group Inc. (TSX:HCG) and Equitable Group Inc. (TSX:EQB), adding more uncertainty to the sector overall.
Invest wisely, my friends.
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