A change to Canada’s mortgage “stress test” will give a boost to alternative mortgage lenders while inflating housing activity in the country, according to analysts.

Canada’s finance department is setting up a new benchmark interest rate for determining if people qualify for an insured mortgage using actual borrowing costs rather than advertised rates. Home buyers will need to qualify at the contract rate or a new benchmark based on 5-year fixed insured mortgage rates, plus 2 percentage points in both cases, the government said Tuesday. Those changes come into effect April 6.

The changes will make it easier for some home buyers to qualify for a mortgage or increase the amount they can borrow.

The country’s banking regulator said it’s considering a similar change for uninsured mortgages and is seeking input before March 17.

Companies with the “highest gearing to the mortgage market” -- Equitable Group Inc., Home Capital Group Inc., Genworth MI Canada Inc. and First National Financial Corp. -- stand to benefit the most, compared with more diversified companies with mortgage businesses such as the large Canadian banks and regional lenders, RBC Capital Markets analyst Geoffrey Kwan said in a note.

Still, Canada’s largest banks and alternative lenders could still benefit as some non-prime borrowers may now qualify for a mortgage with a prime lender, Kwan said.

Higher risk

Kwan noted the “curious timing” of the announcement, given that housing activity is picking up, affordability remains weak in key cities and consumer debt is still elevated. Toronto saw its benchmark home prices climb one per cent in January and 8.7 per cent from a year ago, its strongest annual increase in more than two years, according to the Toronto Real Estate Board. Vancouver’s benchmark prices rose 0.8 per cent last month and fell 1.2 per cent from a year ago.

“Changes are likely to further increase home prices, further stretching affordability and consumer leverage,” he said. “The changes are aimed at the demand side of the equation regarding home ownership, instead of addressing the supply side.”

National Bank Financial analyst Jaeme Gloyn said he doesn’t anticipate a significant boost to mortgage demand, given the increase in purchasing power is only four per cent.

“Overall, the change will modestly stimulate the Canadian housing market and mortgage growth in 2020,” Gloyn said in a note. “Bottom-line, borrowers can either increase the size of their mortgage or actually qualify for a mortgage -- both simulative to the housing market and the mortgage market alike.”

The lower qualifying rate should shift part of the mortgage market from private unregulated lenders back into the regulated mortgage market, Gloyn said.

“We believe this represents a ‘rising tide lifts all boats’ scenario,” Gloyn said, though lenders with more ties to the insured mortgage market could gain the most.

Cormark Securities Inc. analyst Meny Grauman called the change positive for the housing market and by extension for mortgage lenders, but negative from a risk perspective.

“In the short run, this change will likely help some Canadians who currently do not qualify for mortgage financing get into the housing market,” Grauman said. “However, over time this change is likely to only raise prices given increased marginal demand.”

Regulators have praised the stress tests, crediting them with making the financial system safer by bolstering the quality of new lending in a country with some of the highest household debt levels in the world. Concern about debt is one of the reasons the Bank of Canada hasn’t cut interest rates over the past year, despite easing elsewhere.

“To the extent the rule change fans some already-hot regions, it might discourage the Bank of Canada from lowering rates,” Bank of Montreal’s economists said in a note to investors Wednesday.

--With assistance from Theophilos Argitis.