Canadians may face higher mortgage rates with changes, brokers say

A sign advertises a new home for sale in Carleton Place, Ont., on March 17, 2015. (THE CANADIAN PRESS/Sean Kilpatrick)

OTTAWA -- Mortgage lending changes by the federal government are going to make it harder for non-bank lenders to operate and could see Canadians pay higher rates on their loans, mortgage brokers warn.

James Laird, president of mortgage company CanWise Financial and co-founder of rate-watching website RateHub, says the non-bank mortgage lenders offer important competition for the big banks.

"The non-bank lenders keep the banks honest," Laird said.

"It is really important that we keep some sort of third-party pressure on them so they can't set prices at whatever they choose."

Starting Nov. 30, mortgages that lenders insure with portfolio insurance and other discretionary low loan-to-value ratio mortgage insurance must meet stricter criteria that had previously only applied to high-ratio insured mortgages.

The rules place new limits on the types of mortgages that can be insured.

The change, brokers say, will make operating more difficult for non-bank mortgage lenders, who raise the money they use to lend to homebuyers by selling packages of insured mortgages to investors.

The large banks use portfolio insurance too, but they also have other ways to raise the money they use to lend to borrowers seeking mortgages.

"The banks were also heavy users of the bulk insurance program, but they don't have to be," Laird said. "A bank has its own money to lend if it chooses to, where a non-bank does not."

The tighter requirements were part of broad changes that also expanded stress testing on insured mortgages, proposed consultations on lender risk sharing and closed a loophole in connection with the capital gains tax exemption on the sale of a principal residence.

Sherry Cooper, chief economist at mortgage broker network Dominion Lending Centres, said because of the lessening of competition, mortgage rates paid by Canadians will be now be higher.

"Less competition means there's less supply in the marketplace and as a result the price goes up a bit. How much, we don't know, and how big an impact this will be is still quite uncertain," she said.

But Cooper said it's still early days, and that the non-bank lenders are talking to the Finance Department regarding what they can and cannot do.

"I think there is still a lot of uncertainty out there, but I do think at that the end of the day, it does reduce competition," she said.

The government said it recognizes the changes to the portfolio insurance requirements will make it more challenging for some lenders.

However, it said that by targeting government funding support towards safer forms of lending it protects taxpayers from excess housing market risks.

Mortgage insurance in Canada is offered by Canada Mortgage and Housing Corp. as well as two private companies.

The federal government backs CMHC if it's unable to make a payment, as well as the private mortgage insurers which are subject to a deductible of 10 per cent of the original principal amount of the loan if they are unable to cover a payout.

"The federal government is serious about its responsibilities, including making sure that our housing policy framework remains healthy, competitive and stable, protecting all Canadians and the economy from potential excess housing market volatility," Finance Minister Bill Morneau said in announcing the changes Monday.