New mortgage underwriting rules contributed to tighter lending conditions for households in the first quarter of 2018, according to the Bank of Canada’s survey of financial institutions.
The central bank’s quarterly questionnaire of lending conditions had historically focused on business loans but, after a year of collecting data, the results have now been expanded to include household lending as well.
Coincidentally, the first edition of the so-called senior loan officer survey covered the first period of revised standards for residential mortgage underwriting. Financial institutions quizzed for the household portion of the survey reported that the new, “B-20” mortgage standards have had some impact since they came into effect in January, particularly when it comes to “non-price” conditions such as minimum payments and credit limits.
Overall household lending conditions tightened in the first quarter of this year, “driven by mortgage-related lending,” said the survey, which was released Monday.
“The tightening in mortgage lending was driven by recent changes to underwriting standards (Guideline B-20), which mainly affected non-price conditions for low-ratio mortgages and home equity lines of credit (HELOCs),” added the Bank of Canada.
“Price conditions for mortgages also tightened, as the spreads charged to customers increased in tandem with mortgage rates.”
In this regard, the Bank of Canada’s findings may be a preview of things to come. While the country’s big lenders expect mortgage originations to slow under B-20, they have so far said it is too soon to report what the impact has been. For example, Royal Bank of Canada president and chief executive officer Dave McKay told reporters last week that it was “still early.”
Demand for HELOCs and low-ratio mortgages, where 80 per cent or less of a home’s value is borrowed, increased slightly in the first quarter, the Bank of Canada’s survey said. Low-ratio mortgages also fit the criteria for uninsured loans, and are therefore likely to be affected by the new B-20 rules, which now include a “stress test” for uninsured mortgages.
“However, some institutions reported a decrease in demand due to regulatory changes, while others reported an increase, citing some pull-forward from applications received before the implementation of the B-20 changes, as well as expectations of higher interest rates,” the survey said.
Those findings were similar to those reported in the Bank of Canada’s rate-setting decision in March. In keeping its policy rate at 1.25 per cent, the central bank had said there were signs of “some pulling forward” of demand ahead of the new mortgage guidelines and other policies, and added that household credit growth had slowed down for three consecutive months.
Survey respondents also expected a decrease in demand for low-ratio mortgages and HELOCs next quarter, the BoC said. Demand for high-ratio mortgages has tailed off since regulatory changes were introduced in the fall of 2016, it noted.
The household lending section of the BoC’s survey is also broken down into mortgage and non-mortgage lending, with the latter relatively unchanged for the first quarter of 2018.
Meanwhile, overall business lending conditions, the other focus of the Bank of Canada’s survey, eased slightly in the first quarter, the survey found. The bank said this was mainly caused by price conditions, which was driven by “intensifying competition” for corporate borrowers.
Demand for credit among businesses increased in the first quarter, the bank said, the second quarterly increase in a row. Access to capital markets improved “marginally” for all corporate borrowers, the survey said.
Questions for household-related lending “mirrors” that of the one for businesses, the Bank of Canada said. The survey respondents are asked a set of questions about their lending practices, if they have changed compared to the previous quarter, and about demand for credit. It was conducted between Feb. 5 and March 2, surveying 18 financial institutions for the household portion and 17 for the business section.
The Bank of Canada’s spring business outlook survey, also released Monday, found that credit conditions were unchanged for most companies, albeit with some indications of a “slight tightening.”