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First-time home buyers to see a tough mortgage market in 2017

The housing prices in Toronto have increased by 23 per cent in November compared with a year ago.

Melissa Renwick/The Globe and Mail

If you're a first-time homebuyer hoping to live in the big city, beware the government's new borrower "stress test." It could relegate you to the 'burbs.

The new rule requires all insured borrowers to prove they can afford a payment at the posted five-year fixed rate (which is currently 4.64 per cent). That could kill more first-timer home buyer dreams in 2017 than any government rule to date.

The measure will block an estimated 20 per cent of first-timers from getting mortgages this year, at least mortgages in a home and city they want to live in. These are folks who could have qualified just a few months ago.

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Higher low-ratio rates

If you're a mortgage shopper with at least 20-per-cent equity (also known as a "low-ratio" borrower) – you'll pay more interest in 2017. The reason: less rate competition. Bank competitors, who must insure all their mortgages, have been castrated by government rules that ban insurance on refinances, amortizations over 25 years, single-family rental financing and higher-value properties.

Worse yet, effective Jan. 1, 2017, Ottawa's mortgage police will jack up insurers' capital requirements. That'll make low-ratio mortgages significantly more expensive for most bank challengers, pushing their rates higher.

All of this comes despite "low-ratio" borrowers having more skin in the game than high-ratio insured borrowers, despite low-ratio insurance being extremely profitable for taxpayers, and despite stress tests (from the government, Canada Mortgage and Housing Corp., insurers and banks) all confirming losses would be safely contained, even in a U.S.-style housing disaster.

Lower high-ratio rates

Lenders who securitize their mortgages (resell them to investors) often have the lowest mortgage rates. But going forward, Ottawa's rule changes will make securitization prohibitively expensive in many cases. Some non-bank lenders could lose up to one-half of their business as a result.

To mitigate lost revenue, lenders will boost discounts on mortgages that the government still happily insures – those with less than 20-per-cent equity. That means mortgages with the highest loss potential will receive even lower rates in 2017. Perverse, but true.

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Big banks and credit unions win

New insurance and capital rules will thwart mortgage finance companies, thereby damaging rate competition in 2017. Because of how the system now works, mortgage shoppers with 20-per-cent to 35-per-cent equity will see discounts and mortgage options shrink the most. These folks will be pushed right into the arms of major banks and big credit unions, who are less hindered by new rules. With the competition less able to undercut them, these lenders (who often have high penalties and refinance or renewal rates) will take this opportunity to cut mortgage discounts.

Mortgages digitize

You'll see more of the mortgage process go online in 2017. That means more lenders will support e-signatures, let you take pictures of documents with your phone, upload paperwork online and support you via live video chat.

Next year will also mark the birth of robo mortgage advisers. These online "bots" will instantly answer basic mortgage questions with no sales spiel. In time, as they get more intelligent and quote rates and options, bots will put certain commission-based bankers and brokers right out of business. Bet on it.

Robert McLister is a mortgage planner at intelliMortgage and founder of You can follow him on Twitter at @RateSpy

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