The ongoing government policies that have intended to slow the housing market have certainly shown their desired effects over the past few years.  We have seen changes to amortizations, debt service ratios; reduction in the maximum amount Canadians can borrow to refinance their current homes from 85% to 80% loan-to-value, and limits on the maximum loan-to-value on HELOCs to 65%. The hardest hit was first-time homebuyers. And the most recent changes affected investors, those who purchase second homes, and the self-employed.

However, recent economic conditions suggest that mortgage activity will trend upwards for the near future as a modest rise in employment -- 1.2% in 2014 and 1.9% in 2015 according to CMHC’s most recent Housing Market Outlook -- and disposable income is projected to support housing activity.

House prices in many markets are still increasing and sales are healthy in most parts of the country. This is causing concern for Canada’s top banking regulator. Mark Zelmer, deputy superintendent of the Office of the Superintendent of Financial Institutions (OSFI), in a speech last week, focused on the continuing growth in household debt relative to income.

“I would not presume to claim that borrowers are acting irrationally or do not know what they are doing. But, by the same token, it is clear that the ability of the household sector as a whole to absorb major shocks is less now than it was a decade ago,” Zelmer said in a prepared speech.

Zelmer also said stress tests that show Canadian banks are prepared for a downturn, should not be viewed as overarching “safe harbours” because they are based on models and arbitrary assumptions. “Boards and senior management of financial institutions need to apply judgment in a forward-looking manner and not become too complacent in their capital planning exercises,” he said.

While the mortgage rule changes have created a tighter lending environment among the Big Banks, smaller institutional lenders are developing mortgage products to fill the void. Banks do carry a slight competitive edge in the market because they can cross sell to customers. However, smaller lenders are becoming more innovative with their product offerings, which is good news for consumers.

According to Paul Grewal, president of Street Capital Corporation, smaller lenders are continuously looking at different ways to provide a broader product line in order to differentiate itself from the competition.

“Market competition is always fierce and a healthy component of any industry. Although recent mortgage regulation changes have not reduced market competition as a whole, the industry is definitely changing.”
It’s not surprising that OFSI is speaking out now. The spring mortgage market is always a time of high competition and as a result, lower mortgage rates are being offered across the industry. “Competition is always beneficial to consumers -- more choice, more competitive pricing and more product selection are being offered,” Grewal said.

Street Capital is currently in the process of restructuring to become a bank, which will enable the lender to offer new products and services like credit cards and GICs through the mortgage broker channel. This, in turn, will help create a competitive environment for mortgage brokers who will be able to diversify their offerings to consumers.

Hassan Shaikh, Assistant Vice President, Investments, for MCAN Mortgage Corporation, agrees that innovation is key to ensuring a competitive environment that will benefit consumers.
“We, as lenders, have to bring something to the table; one factor might be competitive interest rates,” he said. “However, there are many factors.”

Some of the other factors are those that a consumer won’t see directly but will feel the effects. For example, Shaikh mentions turnaround times and relationship management as two important factors. A smaller lender is better able to move on mortgage transaction quickly, which has a distinct advantage for a certain type of client.

Also, by having built a strong relationship with an underwriter, a broker will have the added benefit of working with a processing team who will try to get an approval on the more difficult deals. This makes the broker invaluable to his client.

Overall, consumers are the beneficiaries of a competitive environment. The introduction of new mortgage rules was the genesis for change, and for a time, it looked as if the competitive environment had been eroded. The industry lost lenders; lenders eliminated many of their product offerings; and the pool of potential home buyers was reduced.

However, smaller lenders and new specialized lenders have stepped up to the plate and the industry is, once again, competitive.