The Motley Fool - There’s no dancing around it There’s no dancing around it. This news is not good for Canada’s non-deposit-taking lenders.
First National Financial Corp.(TSX:FN) is the largest with more than $31 billion worth of mortgages on its balance sheet. Its shares are down more than 20% since the start of the week and continue to slide. This has pushed the company’s yield up to 6.8%.
Home Capital Group Inc.(TSX:HCG), which is Canada’s largest alternative (read: subprime) mortgage lender, has also gotten whacked, falling more than 10% since the the rule changes were announced.
The big issue for these companies is funding costs. On insured loans, funding costs were very similar to Government of Canada bond rates, since these loans are insured by the government. To fund its uninsured-loan program, Home Capital offers GICs through its Oaken Financial subsidiary. These GICs pay more than 2% versus funding costs of about 1% through bonds.
Now, 1% doesn’t seem like much, but it’s an awful lot to banks that charge under 2.5% for prime mortgage customers and only 4% or 5% for subprime borrowers.
And then there’s the market shrinking. Estimates say that under these new rules, approximately 50% of prospective home buyers will no longer qualify for as much home as they want. Fewer customers plus higher funding costs is not an equation that is favourable to small lenders.
https://www.fool.ca/2016/10/07/how-will-canadas-new-mortgage-rules-affect-investors/