New lending rules are anti-competitive. Rates will go up!

The new mortgage rules implemented by the Federal Government were recommended by Canada’s big banks. Not surprisingly, the rules hurt their competition (known as monoline lenders), which reduces the competition in the marketplace and will therefore allow the banks to raise their interest rates.

Approximately half of all Canadian mortgages are coordinated by a mortgage broker. Mortgage brokers were not consulted about these new rules. The majority of mortgages from brokers are funded by a lender outside of the big 5 Canadian banks. The alternative lenders are known as monoline lenders. Virtually their entire portfolio is mortgages. The big banks lend in all sorts of ways (mortgages, cars, business loans), and also hold cash deposits from users like you and I. Monoline lenders have assets on paper and no cash.

How do the new rules benefit only the big banks?

The new rules state that any insured mortgage must qualify for an interest rate higher than what the Borrower will actually pay. Any mortgage with less than 20% down payment is insured by the Borrower. Big banks do not require mortgage insurance if the down payment exceeds 20%. The monoline lender insures any mortgage with 20+% down payment on behalf of the Borrower. They must do this because as an institution they have no cash deposits. They have no collateral, no real money to pay out if a mortgage goes unpaid so they need insurance. In effect, all mortgages from a monoline lender are insured. This means that all of their Borrowers must qualify for a higher interest rate. This makes their offer to the marketplace less competitive than what the banks can offer. It gives the banks power and has already led to higher interest rates, which will probably continue to climb.

The Federal Government looks like they have taken action to protect our economy. The banks increase their profits. The consumer gets to pay higher interest rates.