Canada’s banking regulator warned lenders Monday not to become complacent about the way they underwrite mortgages, reminding them that low interest rates and rising property values aren’t guaranteed.

Jeremy Rudin of the Office of the Superintendent of Financial Institutions said prudent lending practices have never been more important because of the current economic environment.

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“When house prices have been rising for several years and interest rates have remained at all-time lows, complacency can set in,” the superintendent said in the text of a prepared speech for a meeting of mortgage professionals in Vancouver.

“Lenders might be led to believe that weak underwriting standards will be mitigated by ever-rising collateral values.”

Rudin’s speech touched on advice the regulator issued earlier this year on the industry’s practices, including verifying borrower income levels, managing higher-risk loans and ensuring adequate debt service ratios. He said the sound underwriting of mortgages relies on having reliable information about the borrower and the property that’s being purchased.

He mentioned the Bank of Canada’s concerns about increases in household borrowing and mortgage debt, in particular. Last summer, the central bank said the severity of the risks associated with a sharp correction in real estate prices in Vancouver and Toronto as well as from household financial stress have risen.

“A pronounced or prolonged economic downturn could well involve a meaningful housing price correction. This could translate into significant losses for lenders and insurers,” said Rudin.

The superintendent’s office supervises lenders that account for nearly 80 per cent of all Canadian mortgages.

He said too much emphasis should not be placed on collateral.

“Why? Because the value of the debt is fixed, but the value of the collateral is not,” Rudin said.

“House prices in most Canadian markets have never been higher, supported by mortgage rates that have never been lower. In these circumstances, prudent lenders put less reliance on collateral values, not more.”

Earlier this month, the TD Bank (TSX:TD) and Royal Bank of Canada (TSX:RY) increased their fixed mortgage rates, the latest sign that Canada’s big banks are hiking the costs of borrowing for homeowners.

As the dust is settling on the major changes to the mortgage qualifying rate and it is back to work as usual, some Canadians are starting to realize that there were some other significant changes that affect us all.

Starting this year you must now declare which property is your principal residence. There will be a form with your tax return that you must fill out. The purpose of this of course to make sure that the house flippers of the world pay their fair share of income tax on monies earned by buying and selling homes. This will also affect foreign owners, when they sell property in Canada, even though a family member may have lived in it they will now pay capital gains. They are closing some rather large loopholes in the system where many people have taken unfair advantage.

Another point that was probably missed by most is that if you have a home with a legal suite, when you sell the home you will have to pay capital gains on the portion that is rental. Many of these suites collect rent that is never reported to CRA and people avoid taxes by just pocketing the money. For many years now if you collected rent but didn’t report it on your taxes then you were not allowed to use it as income to apply for a mortgage.

This may also open up another legal/accounting question for parents that co-sign on their children’s mortgages. In Alberta at least when you co-sign you are usually on the mortgage and on title. Will it mean that when that home is sold will there be legal and tax ramifications when the home is sold.

Lots of unanswered questions on that subject that you will need to consult your accountant and your Dominion Lending Centres mortgage professional about before proceeding.

Recently introduced mortgage regulations should be assessed to see how they are working before any more are introduced, the CEO of mortgage insurer Canada Guaranty says.

Speaking to the Globe and Mail, Andrew Charles said that first-time buyers are already struggling to become homeowners and are not the reason for price gains in hot markets such as Toronto and Vancouver.

“Regulatory changes over the last few years have made the first-time home buyer a very modest player in the overall Canadian housing market,” he said.

Just last week, the CEO at CMHC Evan Siddall said that there could be a rise in minimum downpayments to further curb price appreciation and financial risk but Charles said such measures would impact the wrong buyers and hurt smaller markets.

He further warned that further changes could have dire consequences for Vancouver, which has already seen activity easing and could be tipped into a sharper correction.

It has been dubbed one of the most important insurance cases of its generation – and now a protracted battle regarding title insurance has come to an end in the Supreme Court of Canada.

The court has decided to uphold a ruling, dismissing an insurer’s appeal – and in the process has prompted many title insurers to review their policies.

According to a Toronto Star report, the case revolves around Paul and Stefanie Macdonald who bought a home in the city that they believed had been poorly renovated by its previous owner. When they attempted to undertake renovations of their own, they found that load-bearing walls had been taken out without building permits – making the second floor unsafe for use. This prompted the city of Toronto to issue a work order to support the unsafe floors with the Macdonalds paying out $75,000. They made a claim to Chicago Title on their insurance policy to cover these costs because the policy was said to provide coverage if the title was unmarketable. However, the claim was denied as the company stated that it was not covered under the policy.

This, in turn, prompted court action beginning in 2014, with the judge ruling that the municipal work order resulted from a hidden defect that was not covered under the policy. It stated that the work order did not affect “ownership of the land” as it was not registered on the property title – even though work orders are never registered against the title.

According to the Toronto Star report, work orders in the province affect a property even when ownership is transferred – and while in the past lawyers would carry out a search for work orders this is often deemed no longer necessary because it is assumed that title insurance will protect the owner.

It was last year that the decision was reversed with the insurer ordered to pay more than $50,000 in costs with the ruling suggesting the hidden defect made the title unmarketable. Now an appeal by the insurer has been dismissed and the ruling upheld.

The consequences of the ruling are far-reaching because it suggests any house with hidden defects could have an unmarketable title – prompting some insurers to quickly adjust their policies to ensur they exclude coverage for significant hidden defects.

Now the risk appears to lay with buyers and the insurers who will still offer coverage.

Last week we touched on TD’s 0.15% move with existing variable rate mortgage clients. There is nothing new to add as TD remains the only lender to make such a move with variable rate clients. Perhaps TD back downs down soon, perhaps other banks join them – time will tell.

The fresh news on rates is that most lenders, not all, hiked the venerable 5-year fixed rate for new applicants by as much as 0.25%.

WHAT DOES IT ALL MEAN?

A 0.25% hike equates to a ~$12.50 per month payment increase per $100,000 borrowed. Hardly a show stopper for many buyers.

These moves are not surprising considering the timing is just a few weeks after the bank’s fiscal year end, and reflective of similar moves in November’s past. The increase is usually followed by a decrease during the heat of the following Spring market.

Long term fixed rates are driven by the bond market, not the Bank of Canada – There is little chance of the BoC increasing Prime anytime soon (NOTE: the next Bank of Canada rate announcement is scheduled for December 7, 2016 – watch my website for more information from our Chief Economist, Dr. Sherry Cooper).

This is a mosquito bite, not a shark bite.

Did Prime go up?

No.

Did my Variable rate mortgage rate change?

No, not unless your variable rate mortgage is with TD.

So the Bank of Canada did not raise rates?

No, in fact they are more likely to lower rates than increase them.

But TD raised rates?

Yes, but only by 0.15% and only for variable rate mortgage holders.

If you are a TDCT client in a variable rate mortgage at TD then read on…

Update RE TD Variable Rate mortgage rate changes

On Nov 1st, 2016 TD announced their own private rate increase affecting just one exclusive group of TD clients. Specifically those in a TD variable rate mortgage.

While the rate adjustment may be minor, at only 0.15%, it is still a change, and nobody likes change.

Does this mean immediate action should be taken?

No.

Does this mean that going variable was a mistake?

No.

Is this change going to stick?

At this point (Nov 11, 2016) no other lenders have followed suit, and TD is effectively all alone on this move. As such TD may back down and reverse the increase.

For those of you with a discount of Prime -0.60% or better, you are still laughing. Such a discount leaves you with a net rate of 2.25% which can only be matched by a two year fixed rate product. And if you have such a discount the odds are you have been enjoying it for some time now as well. Racking up the savings!

For those whose net rate has risen above the 2.25%, keep in mind some of the key features of the TD variable rate product in particular that may make it worth the extra few dollars: You did not wind up in this product with this institution by accident.

The TD variable is a Fixed Payment product, which means your effective payments will remain the same. This is meaningful if the subject property is an investment property as well – no change to your monthly cash-flow.

The TD variable is nearly the only product that can be converted into a 3-year fixed from day one. (Currently ~ 2.29% – but this is just an example, not a suggestion for action) There are greater options with TD than with other lenders.

The pre-payment penalty to break this mortgage is only ~0.50% of the balance, about nine times less than the penalty to break out of their 5-year fixed product (which 60% of clients wind up doing). Keep this in mind before locking in, I am not locking my TD variable in anytime soon.

TD is the only lender that gives you 12 months to find a new home to move the mortgage over to and grants a full penalty refund…even if they give you a deeper discount on the new mortgage! That’s right, a full penalty refund up to a year later, and possibly and even deeper discount!

What is this increase costing me?

A 0.15% increase results in an interest-expense cost increase of $12.50 per $100,000 outstanding.

Got a $300,000.00 mortgage? Then your payment just went up by zero, but the interest component within your payment did go up by $37.50 per month.

Is the Bank of Canada going to raise Prime too?

Highly unlikely by all current estimates.  Said estimates being made by people far smarter than myself.

Will TD raise their own Prime rate further?

This also seems unlikely.

Will TD lower their Prime back to 2.70% to get in line with ALL of the other financial institutions?

Perhaps if TD gets enough pressure from clients they will – and this is where I suggest a call to your TD branch to express your displeasure with them being the only bank to do this to their clients. And only to their mortgage clients.

Do you have an unsecured credit line? Car loan, TD credit card? All good they left the interest rates the same on those. What’s that, you carry no high interest debt? Yep, TD is sparing the folks with consumer debt and only coming after those with mortgage debt. A touch ironic for sure.

Analysts have revised their expectation for an interest rate cut following the result of the US presidential election.

Experts were talking of early 2018 for any change in the Bank of Canada rate but now believe that a cut could be required sooner if exports are affected by new White House policies according to a Reuters poll.

The Conference Board of Canada addressed the issue of the North American Free Trade Agreement, which President Trump has previously promised Americans he would renegotiated to get a better deal.

“Canada should be concerned about potential protectionist policies, but should not panic,” the Conference Board said, noting that it is not clear which comments made in the election campaign would translate into policy.

Canadian employment rose 44,000 (+0.2%) in October–much stronger than expected. But all of the gain was because of more part-time work, as full-time employment fell. The unemployment rate remained unchanged at 7.0% as more people joined the labour force. 

Compared to one year ago, the total number of hours worked was little changed and employment rose by 140,000 (+0.8%, mostly in part-time work (+124,000 or +3.6%). This will certainly keep the Bank of Canada from following the US Federal Reserve’s likely rate hike next month. Indeed, we cannot rule out the possibility of a BoC rate cut next year, although Governor Poloz would likely prefer to see fiscal stimulus do the heavy lifting, particularly given the concern about out-sized household debt levels. 

By industry sector, construction employment continued to enjoy gains, mostly in Ontario and Quebec–notably, not in BC. Manufacturing continued weak with payrolls down -0.4% last month and down -1.5% over the past year. Natural resource payrolls were up on the month, but still down a whopping -5.6% year-over-year, dragging down the overall goods producing sector of employment.

Job gains in the service sector were better, although still lacklustre. Leading the way in this sector last month were trade, educational services, and public and other services. 

Regionally, jobs were up in Ontario by 25,000 last month as the jobless rate fell two-tenths to 6.4%. In BC, employment rose by 15,000, but the unemployment rate increased 0.5 percentage points to 6.2% as more people entered the labour force. Nevertheless, BC still boasts the lowest jobless rate among the provinces. Year-over-year, job growth in BC was the strongest in the country at 2.4% (+56,000). Employment declined in Newfoundland and Labrador, taking the jobless rate up to 14.9%–the highest among the provinces (see table below).

Despite the strong headline number for employment growth, this report continues to reveal a Canadian economy that is underperforming. All of the gain was in part-time work, the manufacturing sector remains weak, and there is no indication of more than a modest pace of economic activity this year, in line with this week’s fiscal update. 

Although the headline payrolls gain of 161,000 missed estimates slightly, the jobless rate fell back to 4.9%–the cycle low–and most notably, wage gains accelerated to 2.8% year-over-year, their strongest pace since the financial crisis. The prior two months’ jobs gain was revised upward by 44,000, another piece of good news. Most would argue that despite the continued long-term underemployment of some workers, the US economy is at or near full employment. The strengthening wage growth is an indication of this, and it will boost the Fed’s already-high probability of hiking rates in December.

There remains a challenge to fill highly skilled jobs. Workers have been in short supply for 13 consecutive months, according to the Institute for Supply Management survey of service-industry companies, which make up almost 90% of the US economy. 

On the disappointing side, however, was the fall in the labour force participation rate and the weakness in manufacturing employment. The number of part-time workers and the long-term unemployed remain higher than before the last recession. These disaffected workers are an important component of the Trump base of support. The US underemployment rate dropped to 9.5% in October from 9.7%, while the number of people working involuntarily less than full-time remained unchanged. An estimated 5.89 million American employees were among this group. 

Expect a Fed rate hike in December–the first one this year. The Fed last increased the overnight fed funds rate in December of 2015, and many had expected additional rate hikes this year. These were postponed repeatedly owing to weaker-than-expected GDP growth and low inflation. US inflation has edged up recently and the Fed signaled strongly earlier this week that a rate hike is likely when they meet next month. 

Don’t blame TD for being the first to act, argues one veteran, but do expect further interruption to the industry that will make mortgages more expensive for the consumer.

“We’ve been talking about this in the mortgage world for a while now. All these mortgage changes affect the monolines; all these capital requirements require rate increases and there are going to be capital requirement changes on the insurers. “Finally, in the end, there is going to be risk sharing, which requires more capital requirements.  At the end of the day, all of the stuff requires higher rates.”

TD Bank was the first lender to act in response last month’s mortgage rules changes.

The bank announced in a note to brokers Tuesday that it was changing its mortgage rates, including increasing its mortgage prime rate to 2.85%.

And according to Butler, the other banks might follow suit.

“Starting in January, banks are going to be required to assign more capital to mortgages.  All these banks are going to be pushed in some sort of direction to raise rates because of these capital requirements on the hot marketplaces,” he said. “But this is their first step – [TD was] just putting this out there and praying that the other banks will go.”

Raising rates is a natural reaction to the recent changes, Butler argues, and the lenders shouldn’t be blamed for passing the expense onto customers.

After all, no successful business will just eat the cost and settle for less profit.

“This is the result of the government’s moves. The government is increasing capital requirements in different layers and different levels of the mortgage business. And by doing so, they require banks to raise rates,” Butler said. “Every business passes government regulation change onto the consumer. TD is doing this because they feel they have to; there is a logical reason behind it based on capital requirements and other banks may change or may not.

“My position is this was not a TD thing. It’s not like TD is going to grab more profit off this.”

In the wake of stricter federal mortgage rules intended to moderate the overworked pace of Canada’s real estate sector, Finance Minister Bill Morneau said that the government has no further plans to cool down the markets at the moment.

Speaking to reporters on October 28, Morneau assured the public that the ministry will remain watchful of how the market will evolve under the new conditions.

“We will remain on top of this because we know this is a very important risk to our economy,” Morneau said, as quoted by Reuters.

The Finance Minister added that he will work to buttress the economy from the worst effects of any future developments such as housing recessions or interest rate hikes.

“At the end of the day, I am ultimately responsible for supporting financial security, and the stability of our financial system,” Morneau stated.

Last month’s regulatory revisions—which featured, among others, the tightening of mortgage rules, the closing of a loophole on home sales, and the implementation of a new risk-sharing model for major lenders—proved divisive among observers and market players.

Former TD Bank president/CEO Ed Clark argued that the changes are exactly what the Canadian economy needed to maintain its stability over the long term, while the Bank of Canada warned that the national economy will experience slight declines in output amid lower home sales numbers.