Who are the winners with the new qualifying interest rate?

The implications of the long-awaited change are somewhat unclear, and some industry insiders say it doesn’t go far enough to fix the problem

Who are the winners with the new qualifying interest rate?

Mortgage brokers and homebuyers across Canada got the relief that many of them have been clamouring for: a change in the qualifying interest rate for insured mortgages.

Last week, Minister of Finance Bill Morneau announced changes to the benchmark rate used to determine the minimum qualifying rate for insured mortgages. As of April 6th, that rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.

“It's fantastic news. Borrowers will now have a little more buying power,” said Michelle Campbell, principal mortgage broker at Mortgage District. “It's definitely a step in the right direction.”

Others, however, are a little slower to rejoice.

“At this time it is too hard to tell – with no idea what the new benchmark rate is going to be, we don’t know if it is just a 10bps or 25bps difference. That difference might increase a borrower’s purchasing power a little but at the same time we will see a potential upswing in increases in prices for the Spring market as well as the perception that the market is hot—which could potentially just mitigate or counteract any potential this change might provide,” said Claire Drage, CEO of the Windrose Group.

The so-called stress test was put into place at a time where the interest rate environment was thought to be rising, and it did effectively put the brakes on the runaway housing markets of Toronto and Vancouver. Given that prices had begun to rise again in Toronto, however, some people question whether or not this is the right time to change it—and whether or not a more regional-specific strategy would had a better effect nationwide. 

In fact, Royal LePage President and CEO Phil Soper recently reiterated this point a few weeks ago, calling for housing policy that meeds the varied economies and needs that vary region to region.

Mixed benefits have also been shared by industry analysts.

“Changes are likely to further increase home prices, further stretching affordability and consumer leverage,” RBC Capital Markets analyst Geoffrey Kwan told Bloomberg. “The changes are aimed at the demand side of the equation regarding home ownership, instead of addressing the supply side.”

But buyers aside—it could be that the entities that stand to benefit the most from this change are the companies with the highest gearing to the mortgage market (i.e., Equitable Group, Home Capital, Genworth MI, and First National) as opposed to companies that are more diversified, such as the big banks and regional lenders.

National Bank Financial Analyst Jaeme Gloyn told Bloomberg that the lower qualifying rate should shift part of the mortgage away from private, unregulated lenders back into the regulated mortgage market. Borrowers at least have a choice to get a larger mortgage or at least qualify for one, both of which stimulate the housing market and benefit lenders.

“In the short run, this change will likely help some Canadians who currently do not qualify for mortgage financing get into the housing market,” Cormark Securities Inc. Analyst Meny Grauman told Bloomberg. “However, over time this change is likely to only raise prices given increased marginal demand.”

The move could be a risky one, as household debt continues to rise. In a note to investors, Bank of Montreal economists said that “to the extent the rule change fans some already-hot regions, it might discourage the Bank of Canada from lowering rates.”