Buyers to feel pinch of mortgage insurance changes

Residential mortTORONTO gage insurance premiums are likely to increase for homes in hot real estate markets as a result of beefed-up capital requirements for Canada’s mortgage insurers coming into force next year.

And it is homebuyers who are expected to bear the added cost, rather than the financial institutions that lend the money for home purchases, according to Peter Routledge, an analyst at National Bank Financial.

“We believe Canadian homebuyers will absorb the bulk of these higher costs directly or indirectly via higher mortgage interest rates,” Routledge said Monday. “Said differently, we do not expect a material impact on bank or mortgage lender earnings strictly as a result of higher mortgage insurance premiums.”

The capital changes proposed last week by the Office of the Superintendent of Financial Institutions require added consideration of factors including a borrower’s credit score, outstanding loan balance, and the amount of time left to fully repay the mortgage. The new rules are to come into effect Jan. 1 following a consultation period, and are intended to account for risks in hot real estate pockets across the country including high price-toincome ratios.

Routledge expects two headwinds to hit the Canadian housing market if the changes go ahead as proposed: higher mortgage rates and a higher probability that foreclosures will increase. The combined impact could contribute to a cooling of the market.

“Mortgage insurance premium increases passed on to the homebuyer through higher mortgage interest rates will reduce affordability, potentially stunting sales activity and slowing house price appreciation,” the analyst wrote.

He said higher mortgage insurance premiums would hit the first-time homebuyers hard, as well as the mortgage broker channel that relies on this group. As a result, he believes, monoline mortgage lenders that originate prime insurer mortgages through the broker channel “are most at risk to a slowdown in sales activity directly related to higher mortgage insurance premiums.”

The analyst said the new rules could also serve to crimp the practice of extending the amortization period of a mortgage to reduce monthly payments when a borrower is in financial distress. This is because, under the new framework, more capital would have to be set aside against those mortgages.

“In our view, this weakens the incentive for mortgage insurance companies to forbear, potentially increasing the likelihood of foreclosure,” Routledge wrote. An increase of properties in foreclosure proceedings, in turn, would weigh on home price appreciation, the analyst said.

He noted increased mortgage insurance costs triggered by the new rules could also drive demand for uninsured mortgages.