By Matt Scuffham
TORONTO (Reuters) - Canada's banking regulator on Tuesday finalized tougher new rules on mortgage lending aimed at safeguarding lenders and borrowers, but warned the measures could push some borrowers into the arms of unregulated private lenders.
The Office of the Superintendent of Financial Institutions (OSFI) said rules on mortgage lending that require stress tests on uninsured mortgages and an end to practices designed to circumvent lending limits will take effect at the beginning of next year.
The regulator has been consulting with the industry on the measures since July and some mortgage brokers and industry executives have said they could make it harder for self-employed Canadians and new immigrants to get mortgages, leaving them with little choice but to borrow from private lenders charging sky-high interest rates.
Canadian authorities have taken action to cool housing markets in Toronto and Vancouver, where prices have soared in recent years because of cheap borrowing costs, speculative buying and purchases by overseas investors.
OSFI Superintendent Jeremy Rudin said the measures would create a safer market for federally regulated lenders, such as the country's biggest banks, which account for about 80 percent of Canada's C$1.4 trillion ($1.1 trillion) mortgage market.
Asked if the proportion of borrowers using non-federally regulated lenders would increase, Rudin said: "We certainly see that as a possible outcome. How much is not something we're able to predict."
He added: "We're very aware of the potential migration risk but that does not change our mind that this is a valuable initiative."
Rudin said he did not expect OSFI to take more action.
CIBC analyst Robert Sedran said the combination of measures introduced in the past 18 months, which included foreign buyers' taxes, could lead to a bigger slowdown than anticipated.
"Our only remaining concern is the risk that all these changes will act in concert to create a more pronounced slowdown than any one regulatory body intended," he said.
The measures could also slow future rate hikes by the Bank of Canada, economists at BMO Capital Markets warned in a research note.
The B-20 rules state that borrowers taking out uninsured mortgages must be stress-tested to determine their ability to make repayments at the greater of the five-year benchmark rate published by the Bank of Canada or a rate 200 basis points, or two percentage points, above their contracted mortgage.
The measures were in line with previous guidance from OSFI. Shares of RBC, TD, Scotiabank, Bank of Montreal and CIBC were all higher on Tuesday. Canada's biggest non-bank lender Home Capital was down 0.8 percent with Equitable unchanged.
Federally regulated institutions are also being prohibited from working with unregulated lenders to get around limits on how much they can lend.
($1 = 1.2539 Canadian dollars)
(Reporting by Matt Scuffham; Editing by Andrea Ricci and Sandra Maler)