Canada’s big banks face housing hangover

Canada’s biggest banks may have to shake off a housing-related hangover in the new year, as new guidelines for uninsured mortgages have homebuyers rushing to borrow now and lenders bracing for weaker loan growth later.

National Bank Financial analyst Gabriel Dechaine said in a report last week that monthly balance sheet data that had been filed with the Office of the Superintendent of Financial Institutions, the federal regulator of the banking system, shows that “mortgage demand is being ‘pulled forward’ ” by the new lending guidelines, which take effect Jan. 1.

“Moreover the trend could continue in early 2018, as bank customers ‘buy time’ by obtaining mortgage pre-approval, which could allow them to purchase a home under older underwriting guidelines for an extended period (i.e. up to 120 days),” Dechaine wrote. “While these borrowing strategies could lead to surprisingly high mortgage volume growth into the New Year, we believe evidence thereof could amplify concerns of a mortgage (and broader housing sector) activity drop-off in the balance of the year.”

The new B-20 guidelines, as they are called, require a stricter “stress test” for uninsured mortgages, which are typically loans made to a homebuyer who makes a down payment of 20 per cent or more. The new minimum qualifying rate for an uninsured mortgage will be either the Bank of Canada’s five-year rate or the lender’s rate plus 200 basis points, whichever is greater.

Management at the big banks said during their most recent earnings season that the new guidelines will weigh on their mortgage numbers, as the guidelines apply to all federally regulated financial institutions. The “Big Six” — BMO, CIBC, National, RBC, Scotiabank and TD — are calling for a five per cent to 12 per cent slowdown in mortgage originations next year because of the new B-20 rules.