As of Nov. 30, Canada’s banks – big and small – have been subjected to new rules impacting the insurance of their bulk mortgage portfolios. Lenders must now apply the same restrictions for high-ratio mortgages to the entirety of their insured mortgage books, regardless of their equity, meaning the following product types will no longer qualify for portfolio insurance:
- Refinances
- Mortgages for rental properties
- Mortgages with amortizations over 25 years
- Mortgages on properties priced over $1 million.
Having fewer mortgages on hand to bundle into mortgage-backed securities (MBS) will have a profound impact on lenders’ mortgage funding, especially for smaller monolines. While smaller profit margins for banks ultimately mean higher rates for consumers, there are a few additional ways this will impact buyers and homeowners.
Discontinuation and mark-up of products:
Without the ability to back their funding with MBS, some of the smallest lenders may opt to stop carrying these types of mortgage products altogether, meaning Canadians will have fewer options to choose from. Most of them, however, will keep them on the roster and will simply hike rates to cover their losses.
Currently, lenders have priced in a 10 to 25 basis-point premium on these products. Not a huge hit for consumers, and still supportive of a competitive marketplace. However, with a few additional changes in the pipeline – such as proposed risk sharing on defaulted mortgages – this could change in the months to come.
Limited refinancing options:
As refinances make up 25 to 30 per cent of mortgage transactions, these products will be most impacted by the new rules, and that could hamper Canadians’ abilities to service their debt. As one of the most common reasons for refinancing is to address inefficient debt – such as rolling a 20 per cent interest-charging credit card balance into a mortgage at 2.7 per cent – this could mean borrowers may be forced to carry more unsecured debt. It could also prompt renewed interest in alternative methods, such as taking out a line of credit and leaving the original mortgage untouched, or HELOC options.
This could also impact current homeowners struggling with “buyer gridlock” – the inability to move up in the real estate market because price growth is outpacing their down payment savings. For many of these owners, refinancing in order to renovate their current homes is a common tactic – one that will now be more cost prohibitive.
Higher rates to come:
It won’t just be small lenders who feel the squeeze of the new rules. While they have considerably more diversified funding sources, the big banks also partake in selling MBS and will price the same premium on their products.
We’ve already seen some pre-emptive action from the big five: in early November, TD hiked its prime lending rate to 2.85 per cent – full 15 basis points higher than the rest of the market – despite no mandate to do so from the Bank of Canada. Mortgage payment timelines increased for their variable borrowing customers as a result, and is widely regarded to be a measure to offset the mortgage rule changes.
TD and RBC – in addition to a number of smaller lenders – have also hiked their fixed mortgage rates, with other banks expected to follow suit. While this is partly due to the “Trumpflation” effect of rapidly rising bond yields, it also signals they’re tweaking what they can to compensate for less MBS issuance.
Adjust client expectations:
The bottom line is affordability for homebuyers continues to shrink. These changes, while not dramatically expensive for consumers, compound on a number of other initiatives over the last year to reduce risky borrowing, such as the mortgage stress test for high-ratio buyers, an increase to the required minimum down payments and tighter underwriting for banks. It’s more important than ever for brokers and sales reps to work closely with clients to help them understand their affordability options and successfully navigate the market.
Penelope Graham is the managing editor of Zoocasa.com, a real estate resource “that uses full brokerage service and online tools to empower Canadians to buy or sell their home faster, easier and more successfully.”
