Big banks tighten grip on mortgage market after rule changes stifle competition
The rules, which stress-test borrowers’ ability to make repayments at 200 basis points above their contracted rates, had been expected to hurt profitability at the banks’ domestic businesses by resulting in them turning away more customers.
However, the country’s biggest five banks, which account for about two-thirds of the Canadian mortgage market, are reporting higher rates of renewals by existing customers concerned they will not qualify for a mortgage with another bank.
The rules, known as B-20 and introduced in January, do not apply when borrowers are renewing mortgages with their current lender, creating an uneven playing field.
“B-20 has created higher renewal rates for the big banks, driving volumes and goosing their growth rates,” said Eight Capital analyst Steve Theriault. “It’s had the unintended consequence of reducing competition.”
Royal Bank of Canada (RBC), the country’s biggest lender, said last month that mortgage renewal rates ranged between 90 and 92 per cent in the second half of its fiscal year compared with 87 to 88 per cent before the new regulations were implemented.
RBC said that is due in part to the B-20 regulations and also to improvements it has made to make it easier for customers to renew.
FLAT INDUSTRY GROWTH
DBRS analyst Robert Colangelo said RBC and Toronto Dominion Bank could exceed their targets for mortgage sales growth of 3 to 5 per cent and 4 to 6 per cent, respectively, next year, given the high retention rates.
“We may see a bit of an uptick in mortgage growth above the guidance that the banks have provided,” he said. “Borrowers have tended to stay with their institutions and not go looking for a bank that might be offering a flashy rate.”
Ron Butler, owner of Toronto-based brokerage Butler Mortgage, said the changes leave borrowers with less choice.
“Even if they are up-to-date with their repayments, borrowers may find they don’t qualify with other lenders so they’re stuck with their bank at whatever rate it offers,” he said.
Senior Canadian bankers such as RBC Chief Executive Dave McKay and TD’s CEO, Bharat Masrani, voiced their support for the new rules prior to their introduction, saying rising prices were a threat to Canada’s economy.
Even if they are up-to-date with their repayments, borrowers may find they don't qualify with other lenders so they're stuck with their bank at whatever rate it offers
--Ron Butler, owner Butler Mortgage
TD increased its residential mortgage book, including home equity loans, by 6.5 per cent during its latest fiscal year to Oct. 31, while RBC expanded its book by 4 per cent. The overall market grew by just 1 per cent during that time.
In contrast, Canadian Imperial Bank of Commerce’s mortgage book, including home equity loans, was flat during the year. The bank has reined in lending after a period of aggressive growth, during which it expanded its team of mortgage advisers and outperformed the market.
While analysts say RBC and TD are expected to benefit from higher-than-normal retention rates in 2019, not everyone is sure borrowers will benefit.
“The banks are becoming more sophisticated in targeting borrowers who would fail the stress test and they can charge them higher rates at renewal knowing they can’t move elsewhere,” Butler said.
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