New restrictions were announced today by the Canadian Mortgage and Housing Corporation (CMHC) that could make it harder to qualify for a mortgage – and may also push mortgage rates to new highs.
The crown corporation has introduced a monthly cap on mortgage guarantees at $350 million for each mortgage lender, including all banks and credit unions. The move is the latest effort made by the government to slow the housing market and decrease Canadian household mortgage debt levels.
Prior to these changes, banks had access to an annual guarantee cap of $900 billion. However, a flux of new mortgages in 2013 has prompted the government to take further action to cool the housing market. The first step was implementing a $85-billion budget for 2013 under the National Housing act Mortgage Backed Securities program – but $66 billion of those funds have already been committed, as of the end of July. The new monthly cap has been put in place to counter this higher than expected mortgage volume.
What Are Mortgage Guarantees?
A purpose of the CMHC is to minimize any financial damage caused to Canada’s lenders as a result of mortgage defaults. Should a homeowner not be able to pay their mortgage payments, the CMHC protects the bank from taking a loss. It is for this reason that high-ratio home buyers (those paying less than 20 per cent down on their home purchase) are required by law to take out mortgage default insurance, as they are viewed as a higher lending risk to the bank.
Mortgage guarantees refer to the total funds available to a lender from the CMHC, which in turn make it possible for the bank to more easily fund mortgages and issue them to borrowers at a lower cost. Rather than guarantee the coverage of each individual high-ratio mortgage, the CMHC provides lenders with this funding in bulk.
Why Will This Cause Mortgage Rates To Go Up?
These new restrictions have made it more difficult for banks to fund their mortgages. A main method for funding is converting mortgage loans into securities and selling them to investors as bonds. However, investors require these securities to be further backed by the CMHC – as a crown corporation, this insurance is akin to a government guarantee that they’ll receive return on their investment.
Banks will now have less of these guaranteed funds to go around, meaning the prices of bonds, which are already high, could spike, taking fixed mortgage rates along with them. According to Ron Butler, mortgage broker at Verico Butler Mortgage, this could add as much as 60 basis points to five-year fixed mortgage rates.
Will It Be Harder To Get A Mortgage?
Less guarantees mean fewer high-ratio buyers may qualify for their mortgages on a monthly basis. According to Butler, “I think we need to tell every client in our conversations with them that there are changes coming in rates and in the ability to simply qualify to get a mortgage and clients need to take action now to guarantee best results.”