On January 17, 2011, federal Finance Minister Jim Flaherty unveiled changes to Canada’s mortgage lending rules that were intended to further stabilize the Canadian housing market, and curb rising household debt. Under the news rules, the maximum amortization period for new government-backed insured mortgages would reduce from the current 35 years, down to 30 years. Mr. Flaherty said mortgages with amortization periods longer than 30 years will no longer qualify for government-backed (CMHC) mortgage insurance, which is required for buyers with less than a 20% down payment on a home.
The good news is, although mortgage amortization will soon be capped at 30 years (for CMHC insured loans), the upfront costs of buying a home remain unchanged. When the new regulations were announced, Finance Minister Flaherty confirmed the minimum required down payment would remain at 5%.
Changes were also introduced to make it more difficult for households to use their property to access financing. Mr. Flaherty lowered the maximum amount Canadians can borrow against the value of their homes on refinancing, down to 85% from the previous 90%. These reductions in maximum amortization and refinancing limits will come into force on March 18, just a few weeks from now. In some cases, exceptions to the deadline would be allowed for financing agreements made before the March 18th date.
These latest mortgage changes are in response to concerns recently expressed by the Bank of Canada about the record level of household debt currently being carried by Canadians. This increase in household debt really isn’t all that surprising, when you consider the near-historic low interest rates that are now available to Canadians, especially homeowners. In recent years, many people have opted for refinancing their mortgages for any number of purposes, including home renovations, buying a second property for income or recreational purposes, or simply to pay off more expensive debt, such as credit card balances. What the federal government is concerned about is that people are using the equity in their homes to obtain a line of credit for the purchase of non-essential items, such as big screen TVs. The reduction in the refinancing limit to 85% means that Canadians will retain at least 15% of the equity in their home, which is a prudent move that is ultimately good for the overall health of the Canadian economy.
But what about the reduction in the maximum amortization period to 30 years for CMHC backed mortgages? Some news media are reporting that this is going to have an impact on the Canadian real estate scene. Frankly, I just don’t see that happening, at least not to any significant degree. It’s just my opinion, but I think when the new regulations kick in next month, the long-term impact will just be a minor ‘blip’ on the real estate radar screen.
An article in the Financial Post on January 17th, quoted Adrienne Warren, senior economist at Bank of Nova Scotia, as saying the impact to the change to amortization would be ‘relatively modest’, at about $100 more per month in carrying costs for an average home. Let’s consider that for a moment.
Realistically, is an increase of less than $25 per week in mortgage payments likely to drive a home buyer out of the market? Remember, Canadians move for lifestyle reasons. They get married, have children, get promoted or transferred. The demand for homes is real and not largely fuelled by speculation.
In some cases, buyers who might have opted for the lower payment of a 35-year amortization period will simply pay the additional amount and move forward with their purchase with a 30-year amortization. This group will be a big winner in the long term. Although their payments may rise by a modest amount, they will also be paying off their mortgage and building home equity more quickly, and significantly reducing the amount of interest they will pay over the life of the mortgage. In fact, on a $300,000 mortgage at only 4%, paying off your loan within a 30 year vs. a 35 year amortization period saves you $41,850. That’s a lot of money to keep in your own pocket!
For the percentage of home buyers who may not feel comfortable with paying an additional $100 per month, there are still several options available, including:
• Wait a bit longer to save a larger down payment
• Change your ‘wish list’ of features to find a slightly lower-priced home in your target area, or
• Trade more features for a longer commute
All these options have merit, and prove the point that the mortgage rule change is unlikely to drive people out of the market. Instead, I believe the relatively few buyers affected will simply adjust their plan accordingly and move forward. And remember, for the large number of Canadians who either have 20% or more as a down payment, or who already planned on an amortization period of 30 years or less, there is absolutely no change to consider. It’s business as usual.
These tighter mortgage regulations mark the second mortgage changes initiated by the Federal Government in just under a year. In February of last year, Mr. Flaherty toughened up mortgage rules to help support Canada’s housing market. The regulations introduced in 2010 required borrowers to qualify for a mortgage based on a five-year fixed-rate mortgage, regardless of whether the buyer planned on a shorter-term loan or more affordable mortgage rate. This helped to ensure that buyers would still be able to afford their payments as interest rates rose. In addition, buyers of income properties were required to put 20% down, versus the 5% down payment required for single family homes.
All these measures were intended to keep the real estate market healthy and stable, and support the economy by preventing Canadians from becoming financially over-extended. These latest changes are continuing our national traditional of prudent and conservative financial strategies. Our stringent mortgage requirements have been applauded throughout the financial industry both here and abroad. And this latest news is further evidence as to why the Canadian banking system is the envy of the world.
