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New Capital Regs Coming This November

The cost of funding a mortgage is going up again, thanks to new federal regulations due this fall.

Canada’s banking regulator (OSFI) announced Friday that it will “change” (read increase) regulatory capital requirements on mortgages. The rule change takes effect November 1, 2016, after a public comment period.

“These updates will ensure that capital requirements remain prudent in periods where house prices are high relative to household income and/or house prices are increasing rapidly in nominal terms,” OSFI said in its announcement.

The rules will force seven large banks to put aside more capital for mortgages in potentially overvalued cities. That will add a bigger buffer if the market sells off and these banks start incurring losses. The lucky seven in question include RBC, TD, Scotiabank, BMO, CIBC, HSBC and National Bank. Together, they account for the majority of Canadian lending, so this rule will have a widespread impact.

Upon implementation, the proposed new capital requirements will be calculated using an OSFI-approved formula for price correction risk, which in part is based on Teranet – National Bank’s House Price Index.

OSFI adds: “…Potential losses may become more severe during extended periods of rapid price appreciation and/or periods where house prices are unusually high relative to household incomes – since the value of the collateral underpinning these loans is likely to be less certain in those circumstances.”

It’s too early to tell how much this policy will cost banks. But I’d be surprised if it raised mortgage rates more than 5-15 basis points nationwide. 

Interestingly, since banks usually price the same across the country, a person in a lower-risk housing market could effectively be subsidizing the rates for someone in a higher-risk market.

If you’d like to comment on this proposal, send your thoughts to OSFI here, by June 10.