New Regulation Could Boost Mortgage Rates

So many factors can cause you to pay a higher mortgage rate. One of the least transparent is government regulation.

Since 2008, Ottawa has layered mortgage policy upon mortgage policy, thereby boosting lender funding costs an estimated 25-50+ basis points depending on lender and mortgage type.

These changes include the removal of insurability on various loan types (default-insured mortgages are cheaper to fund), limits on securitization (the ability of lenders to resell their mortgages), higher government guarantee fees on securitized mortgages, higher default insurance premiums, higher capital requirements and stricter loss provisioning (e.g., “IFRS 9”), mortgage-backed securities administration fees and so on.

Come January 1, 2020, the banking regulator (OSFI) is expected to add yet another layer of costs by tightening its “Liquidity Adequacy Requirements.”

The proposed change will affect the deposits you’d make at a bank or trust company. Essentially, for any deposits you might potentially cash out in the next 30 days, a lender must set aside additional liquid assets. These assets act as a reserve in case hordes of people want to withdraw their deposits all at once.

OSFI intends to jack up these reserves by over 150% to 200% in some cases. The goal is to reduce the risk that a “run on the bank” could cause a federally regulated financial institution to fail, like it almost did at Home Capital in 2017.

Mortgage Lender Impact

If you open a high-interest savings account (HISA) with a new bank in 2020, for example, that lender will essentially be able to lend out less of your money than they could today. In other words, it will take mortgage lenders more money to make money, so their costs increase.

By making lenders keep more liquid assets on hand, “it could…be punitive toward some of their lending,” DRBS told the Globe and Mail, “and therefore lower their profitability.” To maintain their target returns, most affected lenders would likely raise mortgage rates and/or cut deposit rates.

For most banks (especially big banks), the impact will be immaterial. It’s smaller mortgage competitors that rely more on short-term deposits that may be most impeded.

Borrower Impact

If OSFI’s guideline is implemented, then depending on the type of lender and mortgage you choose, your interest rate might increase from less than one to four basis points (0.01 to 0.04 percentage points). It would probably amount to little more than a few hundred bucks over five years on a $300,000 mortgage. In other words, this regulation alone isn’t enough to make a big fuss over.

In fact, individual policies affecting lenders’ funding costs seldom have a major effect on family budgets. It’s more like death by a thousand cuts. If you have an average mortgage ($265,923 as of Q4 2018), then you could potentially be paying at least a 25 bps higher rate due solely to all the extra regulation since 2008. This amounts to $3,143 out of your pocket over five years.

That’s why it’s important to consider all the extra expenses regulation adds, as a whole. And the cost to consumers is always easier to calculate than the benefit to consumers (the main benefit here being more financial system stability, which is a good thing). Regulators therefore owe it to Canadians to share their cost-benefit calculations and make this math public via policy impact statements. Only then can officials be judged—and held accountable, if necessary—for the extra cost burdens they impose on all of us.