How mortgage rules will impact market

January 25, 2018 | Last updated on January 25, 2018
3 min read

Rising interest rates are top of mind after last week’s hike by the Bank of Canada and the subsequent moves in prime lending rates from the big banks.

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“As a society, we are more sensitive to the risk of higher interest rates,” says Benjamin Tal, deputy chief economist at CIBC.

And there’s good reason. “During the recession, our debt-to-income ratio went up from 140% to 165%,” says Tal. “In the U.S., it actually went down—from 165[%] to 140[%]. Clearly, our vulnerability to higher rates has risen relative to the U.S.”

Read: Fiscal watchdog warns of growing household debt in Ontario

Despite those numbers, Tal says interest rate hikes aren’t a major vulnerability. That’s because “the disease is also the cure,” he says. “Namely, increased sensitivity to higher interest rates will prevent interest rates from rising to the sky.”

The BoC will closely monitor the effects of rising rates on household debt, so Tal expects the central bank to raise rates slowly and modestly.

Read: BoC hikes interest rate to 1.25% on strong economic data

Hidden mortgages could raise risk profile

For 2018 the increased qualification rate of 200 basis points for non-insured mortgages may matter more than rising rates, Tal says. That new rule has been in effect since the beginning of the year, and aims to cool the housing market.

Tal calls the measure a “significant force” that could slow market demand, as housing sales potentially decrease by 7% to 9%. Further, the measure has a derivative effect, he says, as Canadians flock to alternative lenders when they fail to qualify for mortgages at the increased rate.

The regulators have made it “very difficult” for banks to lend to both new immigrants and the self-employed, says Tal, adding that he’s seeing the fallout of that move. Alternative lenders now account for about 10% of mortgage transactions, says Tal, up from about 6% two years ago.


The alternative mortgage market will continue to grow this year and next as people who cannot qualify for mortgages will go to alternative lenders, he says.

That could result in increased market vulnerability. Says Tal: “We are transferring risk from the regulated segment of the market to the unregulated segment of the market—namely, mortgage investment corporations.” Those corporations are private lenders looking for annual returns of 7% to 8%, which is possible in this market, he adds.

The move to subprime lenders is “clearly not optimal,” as regulators and the government admit, he says. With the new rule, regulators are “trying to reduce the risk in the banking sector, but [… are] raising the risk elsewhere where it’s not very visible,” says Tal, who explains alternative lenders aren’t “in any formal, official statistics, so we cannot see them on a daily basis.”

But he’s not raising alarm bells. “The risk profile in the market might rise a little bit, especially at the margin,” he says.

He also doesn’t foresee falling house prices—a stated risk in the BoC’s latest monetary policy report.

“At this point I don’t see a trigger for a significant correction in the housing market,” says Tal.

Also read:

IMF hikes growth outlook for Canada, world

BoC warns of risks for clients with mortgages

Is Canada’s housing market too hot?

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