Canadian homebuyers expected to bear costs of tighter mortgage insurance rules.    

Residential mortgage insurance premiums are likely to increase for homes in hot real estate markets as a result of beefed-up capital requirements for Canada’s mortgage insurers coming into force next year.

And it is homebuyers who are expected to bear the added cost, rather than the financial institutions that lend the money for home purchases, according to Peter Routledge, an analyst at National Bank Financial. 

“We believe Canadian homebuyers will absorb the bulk of these higher costs directly or indirectly via higher mortgage interest rates,” Routledge said in a note to clients Monday.

We do not expect a material impact on bank or mortgage lender earnings strictly as a result of higher mortgage insurance premiums.

The capital changes proposed last week by the Office of the Superintendent of Financial Institutions require added consideration of factors including a borrower’s credit score, outstanding loan balance, and the amount of time left to fully repay the mortgage.

The new rules are to come into effect Jan. 1 following a consultation period, and are intended to account for risks in hot real estate pockets across the country including high price-to-income ratios.

Routledge expects two headwinds to hit the Canadian housing market if the changes go ahead as proposed: higher mortgage rates and a higher probability that foreclosures will increase. The combined impact could contribute to a cooling of the market.