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IFRS & Mortgage Rates

IFRSIFRS. You’ll hear more about this acronym as time goes on. It stands for International Financial Reporting Standards and it’s basically a newly-adopted set of accounting rules.

The relevance here is how IFRS will impact Canadian mortgage rates.

The first effect of IFRS that we noticed was with Home Trust’s prime mortgage rates. Home’s “A” rates have soared to 70 basis points above the market. Home Trust President, Martin Reid, explained why.

Under IFRS, mortgages that are securitized must be reflected on a lender’s balance sheet. Prior to January 1, 2011 that was not the case. (IFRS securitization guidelines don’t take effect on the big banks until November 1 of this year.)

Once mortgages come on the balance sheet, a lender (if federally regulated) must allocate capital to those mortgages to meet the regulatory asset-to-capital multiple.

For giant banks, with gobs of surplus capital, this isn’t as big an issue. For smaller lenders, it’s a serious matter because it raises capital costs notably.

Home Trust, for example, has had to allocate capital where the return is greatest. In Home’s case, that means it’s now focusing on non-prime mortgages. In turn, Home had to raise pricing on its Accelerator line of prime mortgages to account for higher funding costs resulting from IFRS.

Reid says that IFRS “will impact mortgage pricing and filter down to the consumer.”  How much, he’s not sure.

Paradigm Quest’s John Bordignon, a capital markets expert, said the big banks will be impacted less than small lenders. That’s because they have considerable excess capital and they securitize a lower proportion of mortgages than do smaller lenders.

In the end, Bordignon suggests that mortgage rates may not rise that much as a result of IFRS. He says “the mortgage market has (already) built in 20-25 bps of additional spread in anticipation of it.”

Rob McLister, CMT