A tightening of eligibility requirements for insured mortgages in Canada aimed at cooling hotspots such as Toronto and Vancouver could have a positive impact on Canadian covered bonds, according to Fitch, although Moody’s said other measures could have a mixed impact on lenders.

The rating agency has estimated that home prices across Canada are about 25% above their sustainable value. It noted that there are major regional variations, with some cities particularly overvalued.

Under current rules in Canada, homebuyers making a down-payment of less than 20% of the purchase price must typically be backed by mortgage insurance protecting the lender in the event of borrower default.

The new rules – announced by Canadian minister of finance Bill Morneau on Monday of last week (3 October) – include applying an interest rate stress test for all insured mortgages starting from Monday of next week (17 October). Previously, this test was only required for homebuyers with a down-payment of less than 20% of the home purchase price or for mortgages of less than five years. Tightened mortgage insurance eligibility requirements for “low-ratio” mortgages – mortgages for less than 80% of a home’s purchase price – will also be applied from 30 November.

The government has also proposed no longer exempting non-residents from paying capital gains taxes on income from selling a property.

In a comment published on Wednesday, Fitch said it believes that the package of measures – which come on top of local moves to dampen the impact of foreign investment – may temper the Canadian housing market, particularly in cities that are significantly overvalued. It added that the new mortgage insurance guidelines could improve portfolio credit quality in Canadian registered covered bond programmes, even though such loans are not permitted to be used as collateral.

“While insured mortgage loans are prohibited from securing this sub-sector of the covered bond market, changes to insured mortgage loan underwriting requirements could influence non-insured mortgage loan underwriting requirements,” said the rating agency. “Any tightening of non-insured mortgage loan underwriting requirements would further help to cool the housing market and also help to address the concern of heightened borrower leverage.”

The active, legislative covered bond programmes of Canadian issuers are not permitted to be backed by insured mortgages, but the legacy structured programmes of five of the six issuers – BMO, BNS, CCDQ, CIBC, NBC and TD – include mortgages insured by Canada Mortgage & Housing Corporation (CMHC).

Most of these legacy programmes will expire next year, according to analysts at Commerzbank, with the last structured deals of NBC maturing this month. Only CIBC’s programme will still have outstanding bonds remaining after March, with its last deal maturing in February 2019.

On Thursday of last week (6 October), Moody’s said the announced changes to the insured mortgage rules, and changes to the federal tax code, are credit positive for Canada’s banks and CMHC, because they will improve mortgage loan quality and reduce incentives for speculative real estate investment, thereby reducing the potential for losses on mortgage loans.

However, Moody’s said another measure could have a negative impact on mortgage lenders: the Department of Finance also on 3 October announced a consultation on lender risk sharing, a policy that would require mortgage lenders to absorb a portion of loan losses on insured mortgages that default. The rating agency said last Friday that any changes to the provisions of mortgage insurance to impose risk sharing would be credit negative for Canada’s six large banks. The consultation will take place this autumn.