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Mortgage Costs About to Rise

Katherine Martin • May 10, 2016

Non-bank lenders rely heavily on securitization (selling mortgages to investors to raise money). They then lend that money out to new borrowers. This July, that’s about to get a whole lot more complicated…and costly.

Big changes are afoot in the mortgage business, and they’re coming to a lender near you in two months. They include:

Higher fees for lenders who use government-guaranteed mortgage-backed securities (MBS)
Restrictions on securitizing mortgages in non-CMHC guaranteed securities
A requirement to securitize portfolio (bulk) insured mortgages within six months

New Guarantee Fees

The Department of Finance (DoF) wants to spur development of “private market funding sources” for mortgages. The goal is to reduce Ottawa’s direct exposure to mortgage risk. CMHC’s answer is to raise the cost of government-sponsored funding. The losers here are lenders that depend on securitization methods, like the Canada Mortgage Bond (CMB). These extra fees will likely be passed straight through to consumers in the form of higher rates.

Banning Non-CMHC-Sponsored Securitization

Effective July 1, lenders will no longer be able to directly place insured mortgages in non-CMHC approved securities. Lenders who rely on asset-backed commercial paper (ABCP), which include a few of the top non-bank broker-channel lenders, will have to find another way to sell their mortgages.

That’s a problem for these lenders. Normal securitization, like NHA MBS, require lenders to assemble $2+ million pools of mortgages that are very similar in attributes (similar term, similar interest adjustment dates, similar coupons, etc.). ABCP wasn’t as restrictive. It helped key broker-channel lenders sell off different and odd types of prime mortgages more easily (read, more cost effectively).

There are still a few workarounds for getting insured mortgages into ABCP conduits (e.g., by turning them into NHA MBS pools, paying a guarantee fee and then selling them into ABCP conduits), but that’s more expensive. Once again, these extra costs will be passed straight through to consumers.

The New Purpose Test

Here’s where things get dicey. The DoF has a new “purpose test” starting this July for mortgages that are portfolio (a.k.a., “bulk”) insured. Lenders that bulk insure mortgages will have six months to securitize them. If they don’t, the insurance on those mortgages will be cancelled. (There are a few exceptions, including but not limited to, a 5% buffer and an allowance for delinquent mortgages.)

The goal of this purpose test is to ensure lenders use bulk insurance for securitization purposes and not capital relief (a strategy where big banks insured mortgages and used the “zero-risk” status of those insured mortgages to avoid setting aside capital against them).

This new “purpose test” sounds fairly innocuous, until you look at it from a small lender’s eyes. Small lenders don’t have balance sheets like the major banks. If they fund a mortgage that isn’t eligible for securitization, they have a problem.

Small lenders, for instance, can’t securitize 1- or 2-year terms very effectively. Securitization pools must be at least $2 million, be grouped by amortization, have similar interest rates and cannot be overweighted with big mortgages. As such, the little guys don’t have enough of them to pool and they don’t have a large array of buyers for these short-term mortgages.

The net effect is that smaller lenders (and new entrants) probably won’t be able to price 1- or 2-year terms as competitively. They’ll likely have to sell to big balance sheet lenders (a.k.a., “aggregators”), potentially at margin-squeezing prices. Even if they could pool them, the result would be a larger number of small pools, which are more expensive to sell to investors.

Practically speaking, this could be a real problem for:

renewing borrowers who want a shorter term from a non-bank lender
borrowers who want to refinance (e.g., Someone with two years left on their mortgage who wants to add $50,000 to it can typically blend and increase with no penalty. Going forward, smaller non-bank lenders may limit this feature on terms less than three years)
variable-rate borrowers who want to convert into a shorter-term fixed mortgage (more lenders may start restricting variable-rate conversions to 5-year terms only)

The Takeaway

This latest onslaught of mortgage regs could soon reduce liquidity for non-bank lenders with less diverse funding sources than the banks. Remember that when you hear the DoF and CMHC lauding how their policies foster competition in the mortgage market.

These changes are especially painful to smaller lenders who can’t pool enough mortgages cost-effectively. The result could be more one-dimensional product offerings (e.g., 3-year and 5-year terms only, and fewer mid-term refinance privileges) for these very important bank challengers.

This, in turn, raises costs for customers both directly and indirectly. For mortgages funding after June, there will be a literal step-up in rates. In addition, there’s the indirect impact from less rate competition from smaller lenders. Remember, rates are set at the margin. Consumers have been increasingly exposed to competitive rates from bank challengers, and that in turn influences big bank pricing.

All of this is in the name of reducing government exposure to mortgages, mortgages that have proven time and again to be one of the lowest-risk asset classes in Canada.

Did the federal policy-makers envision all these side effects when they instituted these rules? We have to assume they did, and chose to do it anyhow.

The article “Mortgage Costs About to Rise” was originally published Canadian Mortgage trends, May 9th, 2016. Canadian Mortgage Trends is a publication of Mortgage Professionals Canada.

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Katherine Martin

Origin Mortgages

Phone: 1-604-454-0843
Email: kmartin@planmymortgage.ca
Fax: 1-604-454-0842

Improving Your Credit Score

By Katherine Martin • February 19, 2025

Your credit score and how you manage credit are huge factors in qualifying for a mortgage. If you want the best interest rates and mortgage products available on the market, you want a high credit score. Here are a few things you can do to improve your credit score. Make all your payments on time. Making your payments on time is so important; in fact, it might just be the most important factor in managing your credit. Here's how credit works. When you borrow money from a lender, you agree to make payments with interest on a set schedule until the debt is repaid in full. Good credit is established and maintained by making your payments on time. However, If you break the terms of that schedule by not making your payments, the lender will report the missed payments to the credit reporting agencies, and your credit score suffers. It’s that simple. The more payments you miss, the lower your score will be. If you fail to make payments for over 120 days, the lender will most likely send your debt to be recovered by a collection agency. Collections stay on your report for a long time. So the moment you realize you have missed a payment or as soon as you have the money for it, make the payment. If something prevents you from making a payment, consider contacting the lender directly to let them know what happened and work out an arrangement to make the payment as soon as possible. It's good to note that lenders only report late payments after a payment is 30 days late. If you miss a payment on a Friday and catch it the following Monday, you won't have anything to worry about - except maybe an NSF fee. Now, just because payments don't report until being 30 days late, don’t get comfortable with making late payments; the best advice is to pay your debts on time, as agreed. Stop acquiring new credit. If you already have at least two different trade lines, you shouldn’t acquire new trade lines just for the sake of it. Of course, if you need to borrow money, like to purchase a vehicle to commute to work, go ahead and apply. Just remember: having more credit available to you doesn’t really help your credit score. In fact, each time a potential lender looks at your credit report, it may lower your credit score a little bit. With that said, if you already have two different trade lines and your lender offers you an increase on your limit, take it. A credit card with a $10k limit is better for you than a credit card with a $2k limit because how much you spend compared to your credit card's limit impacts your credit score. This leads us directly into the next point. Keep a reasonable balance. The more credit you use compared to the limit you have, the less creditworthy you appear. It’s better to carry a reasonable balance (15-25% of the card’s limit) and pay it off each month than to max out your credit cards and just make the minimum payments. If you have to spend more than 25% of your card limit, try to remain under 60%. That shows good utilization. Paying down your credit cards every month and carrying a zero balance will undoubtedly improve your credit score. Check your credit report regularly. Did you know that roughly 20% of credit reports have misinformation on them? Mistakes happen all the time. Lenders misreport information, or people with the same names get merged reports. Any number of things could be inaccurate without you knowing about it. You might even have become a victim of fraud or identity theft. By checking your credit regularly, you can stay on top of everything and correct any errors promptly. Both of Canada's credit reporting agencies, Equifax and Transunion, have programs that, for a small fee, will monitor and update you on any changes made to your credit report. Handle collections immediately. When checking your credit report for accuracy, if you happen to find a collection has been registered against you, deal with it immediately. It could be a closed-out cell phone account with a small balance owing, a final utility bill that got missed, unpaid parking tickets, wage garnishments, or spousal support payments. Regardless of what it is, it will harm your credit score if it's registered on your credit report. The best plan of action is to handle any collections or delinquent accounts as soon as possible. Use your credit card. If you have acquired credit cards to build your credit score, but you rarely use them, there is a chance the lender might not report your usage, and that won’t help your credit score. You'll want to make sure that you use your credit at least once every three months. Many people find success using their credit cards for gas and groceries and paying off the outstanding balance each month. There you have it. Regardless of what your credit looks like now, you will continue to increase your credit score if you follow the points outlined above. If you're looking to buy a property and you’d like to work through your credit report in detail, let’s put together a plan to get you qualified for a mortgage. Get in touch anytime; it would be a pleasure to work with you!

How To Establish New Credit

By Katherine Martin • February 12, 2025

If you’re new to managing personal finance and you want to learn about credit, you’ve come to the right place. Establishing new credit is a bit of a catch-22. To build a credit history, you need credit. But it’s hard to get credit without having a credit history. So, where do you start? Well, the first thing you should know is that building credit takes time. It’s not something that happens overnight. If you’re looking to secure mortgage financing, you will want to have a minimum of two trade lines (credit cards, loans, or lines of credit) with a minimum limit of $2500, reporting for at least two years. If you don’t have any credit yet, the best time to get started is right now. However, that may be difficult because, as we've already identified, without a credit history, most lenders won’t feel confident about taking a chance on you. What’s the solution? Consider a secured credit card. With a secured credit card, you make a deposit upfront that matches the amount you want to borrow. A reasonable amount would be $1000 deposited on a single secured credit card. You then use your secured credit card to make household purchases and regular utility payments, paying off the total balance each month. If you default on the money borrowed for whatever reason, the lender will retain the money you put up as collateral. When looking for a secured credit card, be sure to ask whether they report to the two nationwide credit bureaus, Equifax and TransUnion. If the credit card company doesn't report, the credit card account will be useless for your purposes; move on until you find a company that reports to both credit bureaus. Once your secured credit card begins reporting to the credit bureaus, you begin to have a credit score; usually, this takes about three months. Now you can start to seek out a second trade line in the form of an unsecured credit card. Don’t forget to ensure that this card reports to both of the credit reporting agencies. Another option at this point could be a car loan. From here, you simply want to make all your payments on time! But what happens if you’re looking to secure mortgage financing before you have a fully established credit report? Well, if you have someone who would consider co-signing, you can certainly go that route. The mortgage application will depend on their income and credit report, but your name will be on the mortgage. Hopefully, when the mortgage is up for renewal, you’ll have the established credit required to remove them from the mortgage and qualify on your own. Although establishing credit takes a minimum of two years, it really begins with putting together a plan. If you’d like to discuss anything credit or mortgage-related, please get in touch!