Millennials crying foul over sky-high home prices in the big city are being dealt another blow – within two weeks it will be a lot harder to get a mortgage.
The first-time homebuyer is a key casualty of Ottawa’s latest attempt to take some risk out of the country’s housing markets, but those young Canadians aren’t alone. Non-bank lenders will see an important source of funding dry up as a result of further tightening by Finance Minister Bill Morneau.
As one mortgage market observer noted: Ottawa dropped a bomb on the mortgage market, disguised as firecracker.
Here’s a look at the fallout: who loses, and who wins.
New mortgage insurance rules
The seismic move from Ottawa is tied to mortgage insurance. If you make a down payment of less than 20 per cent of the home’s purchase price you’re seeking a high-ratio mortgage, and you need mortgage insurance.
As of October 17, all insured mortgages will be tested at a dramatically higher interest rate than the one being offered by your lender. That stress test rate is based on the Bank of Canada’s posted five-year fixed rate (currently 4.64 per cent).
What does that mean for the homebuyer in need of mortgage insurance? Lower your expectations when it comes to how much home you’ll be approved to buy.
Here’s an example, courtesy of Ratehub.ca:
A family with $100,000 of income that saved up $40,000 for a down payment can afford a $665,000 home today. After Oct. 17, when the new stress test rules kick in, that same family can only afford a $505,000 home. That’s a difference of $160,000, representing a 24% drop in affordability.
Mortgage market expert Rob McLister says “regulators have seriously hit families in the pocketbook.”
“Roughly one in 10 Canadians are up the creek without a paddle, meaning they'll no longer qualify for the mortgage they need,” McLister, founder ofRateSpy.com, told BNN on Friday by email.
Ottawa’s most recent moves, taken with earlier steps, will start forcing mortgage rates higher, McLister added.
“Another one in ten will be up the creek, but the paddle has got more expensive, meaning they'll qualify but pay a chunk more in interest.”
Dan Eisner, founder and CEO of True North Mortgage, told BNN if the new rules were applied three months ago, between 40 to 45 per cent of his clients would have been negatively affected.
Loser: Largely the first-time homebuyer.
Winner: Financial market stability, presumably.
That’s the first part of the mortgage insurance story. Mortgage lenders will also take a portfolio of low-ratio mortgages and have them insured. Why? That portfolio can now be securitized and sold to investors as mortgage-backed bonds.
That’s a key source of funding for non-bank lenders, and that funding is at risk of drying up as Ottawa tightens the rules in that space as well. After November 30, much stricter criteria will be in place governing which loans are eligible for portfolio insurance.
Many of these non-bank, or monoline, lenders are suspending certain product lines. Simply put, if they can’t fund those loans they won’t make those loans.
Loser: Non-bank, monoline lenders. And borrowers, who will have less choice in the mortgage market.
Winner: Big banks, which have multiple sources of funding.
Tightening up mortgage insurance rules is just one of three moves Ottawa is making. Finance is also closing what it calls a loophole that saw non-Canadian residents avoiding capital gains tax when selling properties.
Loser: Foreign homebuyers speculating on Canadian real estate.
Winner: Tax fairness
And, Ottawa is starting a consultation process on banks having more skin in the game when it comes to insured mortgages, what it calls “lender risk sharing.” That could result in something akin to a deductible the bank would pay if an insured mortgage goes sour.
Winner: The Canadian taxpayer, whose exposure to the housing market through CMHC insurance would presumably be reduced.
Loser: The Canadian homebuyer, who will likely face higher mortgage rates as banks pass on higher funding costs.