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Banks tighten mortgage rules for foreign home buyers

A man rides a bike past houses in east Vancouver.

DARRYL DYCK/The Globe and Mail

At least two Canadian banks have tightened restrictions on mortgages granted to non-resident home buyers amid widespread concerns about the overheating housing markets of Vancouver and Toronto.

Last week, Bank of Nova Scotia amended its income verification policy for non-residents, ending what it called a "pilot program" that had allowed some customers to get around income verification policies if they had large down payments.

Starting Monday, Bank of Montreal will require all applicants in its new-to-Canada and non-resident lending programs to include documentation that verifies their wealth and the source of their income.

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"We continually review our policies in keeping with our strong customer focus and risk management," a BMO spokesperson said.

Read more: In the housing market, foreign buyers are given a different set of rules

Read more: Canadian banks' mortgage guidelines favour foreign home buyers

Read more: Vancouver real estate speculators taking advantage of loopholes and lax oversight

Earlier this month, The Globe and Mail reported that some Canadian banks have been allowing foreign clients with no Canadian credit history, including students, to qualify for mortgages without proving the sources of their income.

Some observers believe that non-residents – often armed with large down payments but inadequate proof of incomes – are driving some of the frothiness in urban markets, raising the risks associated with a market downturn. Banks themselves have expressed concerns that some areas of Canada's housing market need cooling as home prices surge.

The banks have long helped non-resident home buyers to secure mortgages, insisting on higher down payments and enforcing strict anti-money laundering controls, but now appear to be raising the thresholds for some loans.

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In a memo obtained by The Globe and Mail, Scotiabank said that standard income verification for all mortgage applications are necessary as of Sept. 21.

A Scotiabank spokesperson said that its pilot project – part of a larger program to assist non-resident home buyers – had been developed in response to "competitor market research" and was used by mortgage brokers and mobile mortgage specialists outside the bank's branches.

Prospective home buyers had to come up with a down payment of as much as 50 per cent to qualify for the program.

"The pilot was slated for cancellation weeks ago to improve standardization across all channels," the spokesperson said in an e-mail.

It remains unclear why standardization was deemed necessary and how popular the pilot program was.

However, Scotiabank said that non-resident mortgages represent just 0.2 per cent of its $200-billion mortgage book. It does not grant mortgages to non-residents who have down payments of less than 35 per cent.

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Bank of Montreal has also been tightening some of its lending policies for home buyers who are non-residents or new to Canada. It said that changes are part of a continuous review of policies that are based on market conditions.

Applicants with a minimum 35 per cent down payment can now qualify for mortgages up to $1-million, down significantly from a reported $2-million cap on loans previously. The change was made in June.

BMO also stopped lending to foreign students in April.

The changes by the two lenders come as a chorus of voices, including the Bank of Canada, the Department of Finance and the Organization for Economic Co-operation and Development, offer ideas on how to control surging home prices in particularly hot urban markets.

Some of Canada's big banks have weighed in, too.

Brian Porter, chief executive officer of Scotiabank, said in June that Vancouver and Toronto looked "frothy." However, he insisted that cooling both markets required government action, given that competitive pressures made it unlikely that lenders could do the job themselves.

Mr. Porter suggested raising down payments, increasing the qualifying rate for five-year fixed mortgages and imposing a temporary luxury tax on foreign buyers.

"We've been encouraging the government to do some things here, and we've been consistent for years," Mr. Porter said.

Louis Vachon, CEO of National Bank of Canada, has also called for tighter restrictions, suggesting higher down payments.

Canada's main banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), allows lenders to assist home-seeking customers who cannot provide standard paycheques, as long as the lenders use what it calls "prudent underwriting standards."

"We look at exceptions on a regular basis, with a range of customers," the Scotiabank spokesperson said. "Those exceptions include people who are self-employed, come from small business backgrounds, new Canadians and non-residents."

The spokesperson added that the adjudication process for non-resident applicants is more stringent than it is for Canadian applicants with standard paycheques.

Royal Bank of Canada said that for non-residents, it requires proof of income from an employer or business, along with a list of assets. Applicants who are new to Canada and don't have a job or business must provide a 35 per cent down payment and proof of at least 12 months of mortgage payments, the bank said in a statement Sept. 14.

According to a recent survey by the British Columbia provincial government, foreign home buyers accounted for 10 per cent of the total value of residences purchased in Metro Vancouver over a five-week period in June and July.

Other official statistics show that foreigners own 3.3 per cent of all condominiums in Greater Toronto and 3.5 per cent of condos in Metro Vancouver.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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