Last month in my blog, I talked about new Canadian Government rules coming into effect and how they might impact the mortgage lending landscape. Besides explaining the new mortgagequalifying stress test, I touched on CMHC’s (Canadian Mortgage and Housing Corporation) soon-to-be-gone role as a provider of “bulk” or “low-ratio” mortgage insurance to the mortgage lending industry, and how it provided stability and promoted competition. As of Nov 30th, 2016 CMHC officially no longer provides that and certain other services, hence many mortgage lenders who had previously relied on these categories of mortgage insurance to manage their lending operations have been forced – over the last 30 days – to dramatically scale back their offerings.
Not all lenders are as seriously impacted. In a Nov 28th Financial Post article, a bank analyst is quoted regarding his earnings outlook for the BIG 5 banks, expecting them “to benefit from ‘lessened competition’ as new mortgage insurance rules push smaller firms whose primary business is [was only] mortgage finance to the sidelines.” He goes on to say, “the big banks…have already begun to [respond] by raising the rates charged to home buyers on certain loans.” (Yep, they have!)
So how does the prospect of less mortgage competition and fewer residential lending products impact you? If you are a homebuyer with good credit, stable employment, and between 5% and under 20% down payment, then there will remain plenty of lending competition for you. If you have 20% or more down payment or equity (with a good job and stable income), the new landscape will be fewer lenders competing for your business and at higher relative rates, being one of the lending categories affected by the new rules (seriously). Other lending categories negatively impacted for many lenders include reduced offerings for self-employed (with low income declaration), refinances, equity-take-outs, second home financing, rental property financing, amortizations over 25 years, and properties more than $1mil.
So how does the mortgage lending industry respond? It is useful to understand that, besides the Big 5 banks, there are numerous smaller banks, trust companies, credit unions, mortgage investment corporations, and private lenders that will step forward to fill the gaps created by CMHC’s withdrawal of support from parts of the mortgage market. Perhaps you have heard of Canadian Western Bank, Equitable Bank, Bridgewater Bank (owned by AMA), B2B Bank, MCAP Mortgages, Home Trust, just to name a few. There are probably 50+ on the list, and the good news is that there will still be competition for your business. Typically, you can access these lenders through mortgage brokers who will help you identify and compare your options if your current mortgage lender now says, “sorry, can no longer do that.”
Will interest rates on these affected mortgage categories be relatively higher? The answer is likely yes. With CMHC now refusing to insure certain loan categories against borrower default (a.k.a. more risk passed to the lender), lenders will now recover the cost of increased lending risk directly from you. And they do that by charging interest rate premiums or requiring a larger down payment/equity.
If there is a single take-away from this article, it is to be pro-active. Take a few minutes to talk to your mortgage professional today and learn if or how you will be impacted the next time you need to get or renew a mortgage and adjust accordingly.
About the author - Chris Richards is a licensed mortgage broker with Quantus Mortgage Solutions in Cochrane AB and can be reached at 403.909.7160 or Chris@RichardsMortgageGroup.ca