The Canadian Mortgage Landscape Is About To Change

In a little over a week, on Wednesday, November 30, the next round of mortgage-rule changes will take effect, and while we can’t predict exactly what the impacts will be for every lender, we do know that our mortgage market will begin to look different.

My recent post on the latest round of mortgage-rule changes provided a detailed explanation of the coming restrictions, but to quickly recap, our policy makers will now restrict the types of low-ratio mortgages that are eligible for default insurance. Affected borrowers, such as refinancers and investors who want to buy single-unit rental properties, will still have access to financing, but since their loans will no longer be eligible for default insurance, the number of lenders who can offer solutions to these borrowers will decrease, and the cost of these types of loans will increase.

Over the very short term then, if you’re a home owner who is contemplating a refinance of your existing mortgage, this is your last week to get your application in before the new changes take effect. (Purchasers who will be affected seem less likely to be able to accelerate their buying plans to get in under the wire, especially this late in the game, but they should be forewarned as well.)

Since the upcoming rule changes will be top of mind this week, here are three key questions relating to them that will be answered in the fullness of time:

Will Our Private Mortgage-Default Insurers (Genworth and Canada Guaranty) Offer More Flexibility than the Canada Mortgage and Housing Corporation (CMHC) In Future?

I wrote a post about CMHC, the crown corporation that dominates our mortgage default insurance market, back in 2010. In it, I argued that CMHC’s influence was discouraging private market innovation. I wrote that “in the end, a more balanced market that includes risk-based pricing is the ideal we should be shooting for, with CMHC setting the baseline and private insurers constantly innovating to ensure that every willing investment dollar is matched to borrowers who need additional flexibility to qualify (and who are willing to pay more for the privilege).”

The key question now is: Does this next round of mortgage-rule changes finally open the door for this evolution to occur?

I am already hearing that Genworth and Canada Guaranty may offer a bit more flexibility than CMHC in some of the newly restricted areas, but it will take some time before this additional latitude becomes clear. To cite one example, while bulk insurance will technically no longer be offered on properties with a purchase price of more than $1 million, I have heard from a confidential source that Genworth and Canada Guaranty may still default insure these loans up to maximum loan-to-value of 65%, or even higher for professionals such as doctors, lawyers and engineers.

If our private mortgage insurers begin to offer enhanced flexibility and innovation, even at higher cost, that will be a healthy long-term development for our mortgage market.

More broadly, if Canadian residential mortgages are seen as an attractive investment relative to the alternatives, we may see the private market step in to fill the voids left by the withdrawal of government-backed insurers. That said, Canada’s asset-backed commercial paper market hasn’t recovered since the financial crisis in 2008, so this will take time. But as the cost of certain types of mortgages increases, the available yields should look increasingly attractive to private investment and, as this process of price discovery evolves over time, we could see an increase in private demand that would broaden the pool of capital available to our lenders.

Again, this would be a healthy long-term development.

Will Last Week’s Bond Yield Spike in Combination with the Latest Rule Changes Slow Some Regional Markets More Than Expected?

The next round of mortgage-rule changes will now coincide with the surprising U.S. election results. Our policy makers had grown increasingly concerned that the current extended period of ultra-low mortgage rates was fueling excessive borrowing and leading to speculative investment in hot regional markets. Restricting the availability of mortgage-default insurance was a creative way to raise borrowing costs for mortgage borrowers, while allowing the Bank of Canada to leave its policy rate unchanged in deference to the beleaguered state of our broader economy.

But our policy makers probably didn’t anticipate the Trump win, or the biggest surge in our bond yields in more than a decade that followed on its heels. (I think that the bond market may have over-reacted, as I wrote in last week’s post, but that didn’t stop mortgage rates from rising in sympathy last week.) So in a very short period of time we will have had a Trump-fueled mortgage rate-increase, which translated into a twenty-five basis point increase on the average five-year fixed-rate mortgage, followed by an additional rule-change-fueled increase for about half of the total mortgage-origination market, which should translate into another increase of anywhere from ten to twenty-five basis points on the affected five-year fixed-rate mortgages.

Quite a reversal after eight years of steadily falling rates, and this greater than expected impact on our rates leads me to wonder how our more balanced regional real estate markets, like Calgary, Montreal and Halifax will fare over the short term. Time will tell.

Will the Next Round of Rule Changes Pop the Vancouver and Toronto Real-Estate “Bubbles”?

On a related note, if you only read the headlines in the mainstream media, you are probably convinced that Toronto and Vancouver are experiencing house-price bubbles that will soon burst. But are these cities really over-valued?

There are data that suggest not. For example, a recent study by National Bank Financial compared the prices of a 970-square-foot condo in the world’s most expensive cities and Vancouver ranked 14^th while Toronto ranked 16^th with the prices in both cities coming in at about half of the prices in New York. When you overlay that price comparison with the recent Economist survey of the world’s most liveable cities, which ranked Vancouver 3^rd and Toronto 4^th (New York was outside of the top 20), you can make the argument that both cities are only now getting their due on the world stage (and Toronto and Vancouver have consistently ranked high in other, similar livability surveys).

While it’s true that affordability levels are stretched in both cities, when comparing average prices to other world-class cities it would appear that prices in both Toronto and Vancouver may still have room to run.

Five-year GoC bond yields rose eleven basis points last week, closing at 0.99% on Friday. Five-year fixed-rate mortgages are now available in the 2.39% to 2.59% range, depending on terms and conditions that are important to you, and five-year fixed-rate pre-approvals are offered at around 2.69%.

Five-year variable-rate mortgages are still available in the prime minus 0.30% to prime minus 0.40% range, which translates into rates of 2.30% to 2.40% using today’s prime rate of 2.70%.

The Bottom Line: The upcoming mortgage-rule changes are expected to push mortgage rates higher for affected borrowers, like refinancers and rental-property investors. While these changes could inspire a healthy evolution of private-market innovation over time, their impact will not be felt evenly across our regional markets, especially given the Trump-fueled bond-yield spike that proceeded them. Over the short-term, expect some mortgage rates to head higher this week as lenders prepare for November 30. On a related note, if you’re thinking about refinancing your current mortgage, this is the last week to do so under the old rules.