The impact of mortgage regulation changes

On October 3, the Government of Canada announced measures designed to support the health and stability of Canadian housing markets and housing finance system. The measures include new eligibility rules for high ratio insured mortgages (where the loan to value ratio is greater than 80%) and new eligibility criteria for low ratio insured loans (loan-to value less than 80%) that previously only applied to high ratio mortgages.


Under the new measures, all high ratio mortgages will now be “stress tested” to ensure borrowers can afford their loan if interest rates rise.  Borrowers will now have to meet higher debt servicing limits calculated using the greater of the contract rate and the Bank of Canada’s 5 year posted rate.  The latter is currently more than 2% higher than typical contract rates.  This “stress test” approach has been applied since 2010 to variable rate mortgages and fixed rate mortgages of a term of less than 5 years.  Applying this stress test to loans with terms of five years and longer extends this test to all high ratio insured mortgages.


As the policy just took effect, it is difficult to precisely evaluate the impacts on housing markets. In general, an increase in mortgage rates affects house prices, sales, and starts negatively. However, the stress test approach affects the size of the insured mortgage for which the home borrower qualifies and it is not an increase in the mortgage rate itself.


As a result, borrowers could adjust their purchase behaviour in several ways.  For example, they could purchase homes that are less expensive, add more down payment, delay their purchase in order to save additional funds for down payment, or add a co-signor. 


According to our analysis, from 5 to 10 per cent of all prospective home buyers could be affected during the first year of implementation, but the precise impact will vary depending on specific homebuyer circumstances and behaviours.  Considering regional variations in drivers of housing activities, it is also likely that the impact of the announced changes could be different across the country. Taking into account all possible scenarios, the impacts on house prices, sales, and starts are within the lower band of our outer forecasting range that is designed to capture unexpected economic and financial developments, as well as unforeseen regulatory changes at the local, provincial, and national levels. 

(Source: an excerpt from CMHC Fall 2016 Report: Housing Market Outlook – Greater Toronto Area” <—click to download full report)