One of Canada’s largest banks has opined on the impact the portfolio insurance changes will have on mortgage rates.

Starting November 30, lenders will only be allowed to purchase portfolio insurance for loans that cost less than $1 million, are owner occupied, have an amortization period no longer than 25 years, among other stipulations.

This could mean higher mortgage rates, according to TD Bank, which laid out three scenarios that could come to pass as a result of the rule change in its latest report, entitled New Mortgage Rules to Reinforce Soft Landing in Canadian Housing.

Lenders pass the higher cost of funds onto consumers in the form of higher mortgage rates. Under this scenario, mortgage interest rates could rise up to the full amount of 30 to 40 basis points.

Lenders absorb the higher cost of funds due to competition.

Lenders become more stringent on approval guidelines in order to continue to take advantage of the cost savings offered by portfolio insurance. As such, borrowers could potentially be held to a maximum amortization period of 25 years. 

Portfolio insurance helps lenders reduce the cost of raising capital and all monoline lenders utilize it to compete with the big banks.

And portfolio insurance is becoming more ubiquitous.

“Portfolio insurance accounted for 20% of all new mortgage insurance put in force with CMHC in the first half of 2015, but accounted for 40% during the second quarter of this year,” TD Bank said. “In particular, the increased use of portfolio insurance has helped alternative lenders offer competitive pricing on mortgages.”