Thursday morning the Government of Canada’s announcement, regarding changes to Government Backed Insured Mortgages, effective July 9th 2012.
- Amortization Period is REDUCED to 25 years for high ratio applications. Banks can continue to offer 30 year amortization on LTV’s 80% or less
- Refinancing is REDUCED from 85% LTV to 80%
- Limit GDS to 39% and TDS to 44%
- Maximum Purchase Price for government backed mortgage insurance is $1 Million. Homes above $1 Million must have 20% down payment
The Bank of Canada has identified elevated household indebtedness as the most important risk to financial stability in Canada. The traditional tool to control borrowing through raising interest rates is not an option due to the global financial crises. Ottawa also wants to control the excessive demand for housing in cities like Toronto and Vancouver especially the condo resale market.
Similar tactics have been tried in the past, most recently in the fall of 2011 and have failed for the simple reason that these policies have failed to address the core problems. Below is a review of the real issues and how a continuation of government interference into the Canadian mortgage market is ultimately going to impact you.
1. The government pool of funds available for CHMC insurance has been maxed.
Reducing the amortization period will make it more difficult for first time buyers to qualify for a mortgage. I have been told that as many as 40% of first time buyers select a 30 year amortization. Eliminating first time buyers slows the real estate market as first time buyers are the stimulus in all housing markets. Less potential buyers means a greater inventory of homes for sale, resulting in lower prices and lower valuations for current home owners.
An alternative strategy for maintaining the CHMC pool of funds is to simply eliminate the lenders that use CHMC as a safety net for their underwriting policies on conventional mortgages where the down payment is greater than the 20% threshold. These mortgages are generally secure and the need to insure them is redundant.
2. Hot real estate prices in Toronto and Vancouver.
My understanding is that much of the speculative nature of the condo market in these cities is precipitated by the injection of money by foreign investors seeking a safe haven to park their funds. Canada has a reputation for a sound economy and our housing prices are favourable compared to many other countries.
An alternative strategy would be to restrict foreign ownership of residential housing to just owner occupied dwellings. Many foreign investors do not require mortgages so changes to our rules will have no impact.
3. Elevated household indebtedness
Ottawa’s argument that Canadians should not be using their homes as their personal ATM is ridiculous and reducing the ability to refinance a home to 80% of its value may be the tipping point that actually leads to more mortgage defaults. Most Canadians refinance their homes to consolidate higher interest debt such as credit cards, into lower interest debt which is a prudent strategy. By restricting this refinancing option, the credit card debt does not magically disappear. Canadians will be forced to continue paying high interest rates on this debt and will continue to struggle. The big banks must love this change in policy.
The reason I view 80% as the possible tipping point is that until now the mortgage industry could assist customers in a refinance, even if it was a temporary solution, until they could correct their credit issues. Staying in the current home still made sense compared to selling or walking away from the home. Given you only require 5% down to purchase a subsequent home we will now see many Canadians selling their homes for the sole reason of accessing that additional 15% in available equity. This will result in more homes flooding the market, resultingin lower prices and lower valuations for current home owners.
An alternative strategy would be better education of financial literacy in this country so individuals understand how to manage their credit and the pitfalls of the buy now, pay later mindset. The government’s assumption that they know what is best for us in terms of managing our financial affairs is again ridiculous. Teaching financial literacy as part of our education system would be a better strategy.
(If you enjoyed reading this post please subscribe to our Company Facebook Page here.)