Canada’s mortgage rules to tighten again ~ RBC Current Analysis
By Robert Hogue, Senior Economist RBC
CURRENT ANALYSIS
June 21, 2012
Canada’s mortgage rules to tighten again
years from 30 years.
and practices, which among other things, define internal controls, reporting and
monitoring expected of federally-regulated financial institutions.
Implications
Consider it a full reversal, now. Bit by bit since the fall of 2008, the federal government has undone the loosening of mortgage rules that took place from 2004 to 2006 – a period during which the mortgage insurance business in Canada was opened up to new mortgage insurance players and to new ‘innovative’ practices. This loosening applied to government-backed insured mortgages. It included the extension of the maximum amortization period to 40 years (from 25 years previously), 100% financing and
95% loan-to-value refinancing. This latest move by the federal government — its fourth since 2008 — effectively turns back the clock to the pre-2004 state of affairs, resetting mortgage lending rules to more prudent, if conservative, standards. According to Minister Flaherty, the aim is to both strengthen Canada’s housing finance system and “ensure that households do not become overextended”. On the latter point, record high household debt (152% of income) has been singled out as the biggest risk facing the domestic economy by the Bank of Canada.
Of today’s changes, the further reduction of the maximum amortization period to 25 years will have the most direct impact on the Canadian housing market. Based on a typical mortgage size ($288,000 for a bungalow) and posted mortgage rate (5.24%), the reduction in the amortization period from 30 years to 25 years would raise a home-owner’s monthly mortgage bill by $136, representing a material increase of 8.6%. Such an increase would be the equivalent of a 75 basis point hike in interest rates to someone who would have otherwise gone for a 30-year amortization period. The Ministry of Finance’s own figures show increases in monthly mortgage payments ranging between 9.0% and 12.5% (depending on interest rate assumptions). Viewed another way, the shorter amortization period would require the qualifying income needed to purchase a home — i.e., the income threshold under which homeownership costs (mortgage payments, property taxes and utilities) exceed a ratio of 39%, as per the new GDS rule — to rise by 6.7% (from $62,970 to $67,160). In effect, this will raise the barrier to entry into Canada’s housing market.
Given that first-time homebuyers rely proportionately more on longer amortization periods — last year, 40% of new mortgages were amortized over periods longer than 25 years compared to 25% for total outstanding mortgages, according to a survey by the Canadian Association of Accredited Mortgage Professionals — the new rule will dampen first-time homebuyer demand in Canada.
The change to the amount of refinance will more directly affect the financing tools available to consumers. (Consumer spending will also be impacted indirectly by the shorter amortization, as the higher mortgage payments will reduce funds available expenditures other than housing.)
We expect the new caps on GDS (39%) and TDS (44%) to have little impact. CMHC already applies more stringent maximums for riskier borrowers (35% GDS and 42% for credit scores below 680) and has the TDS ceiling of 44% in place for lower risk borrowers. The only change for CMHC will be the application of a 39% GDS maximum for the lower risk borrowers.
Finally, the new limit of government-back insurance coverage to properties valued at less than $1 million could, at the margin, cool demand for the high-end market segment; however, the proportion of high-ratio mortgages in that segment is likely small.
The separate announcement today by OFSI provided federally regulated financial institutions in Canada with the final guideline on residential mortgage underwriting and practices. Focusing more specifically on financial institutions’ internal procedures, the guideline aims at ensuring that strict controls are followed, and disclosure and monitoring are enhanced in the mortgage business. We expect little material impact on the housing market in Canada arising from the final guideline.
The new rules announced by Finance Minister Flaherty today came as somewhat of a surprise given that Canada’s housing market was not demonstrating signs of overheating for the most part. We remain of the view that the market is in transition to a moderate and sustainable path. As is often the case when rules are changed, the new rules are likely to set off some kind of a stampede in the next few weeks of purchases’ looking to take advantage of the current terms. Past July 9, however, the new rules are likely to restrain homebuyer demand, particularly from first-time buyers. We would expect this restraint to accelerate the process of moderation in housing market activity; yet, we do not foresee any serious correction threatening the stability of the market. Canada’s housing market will continue to find support from an expanding economy and the growth in employment and household income that this will generate.
Please call The Tony Marino Team of Royal Lepage Top Producers Real Estate at 204.942.2583 or visit us at www.TonyMarino.ca
CURRENT ANALYSIS
June 21, 2012
Canada’s mortgage rules to tighten again
- As of July 9, 2012, the rules for government-backed insured mortgages will tighten
- Canada’s Finance Minister Jim Flaherty today announced that the maximum amortization
years from 30 years.
- The maximum amount that an individual can borrow when refinancing will be
- The federal government will set a maximum for gross debt-service ratio (GDS) at
- Government-backed insured mortgages will no longer be available for homes with
- In a separate announcement today, the Office of the Superintendent of Financial
and practices, which among other things, define internal controls, reporting and
monitoring expected of federally-regulated financial institutions.
Implications
Consider it a full reversal, now. Bit by bit since the fall of 2008, the federal government has undone the loosening of mortgage rules that took place from 2004 to 2006 – a period during which the mortgage insurance business in Canada was opened up to new mortgage insurance players and to new ‘innovative’ practices. This loosening applied to government-backed insured mortgages. It included the extension of the maximum amortization period to 40 years (from 25 years previously), 100% financing and
95% loan-to-value refinancing. This latest move by the federal government — its fourth since 2008 — effectively turns back the clock to the pre-2004 state of affairs, resetting mortgage lending rules to more prudent, if conservative, standards. According to Minister Flaherty, the aim is to both strengthen Canada’s housing finance system and “ensure that households do not become overextended”. On the latter point, record high household debt (152% of income) has been singled out as the biggest risk facing the domestic economy by the Bank of Canada.
Of today’s changes, the further reduction of the maximum amortization period to 25 years will have the most direct impact on the Canadian housing market. Based on a typical mortgage size ($288,000 for a bungalow) and posted mortgage rate (5.24%), the reduction in the amortization period from 30 years to 25 years would raise a home-owner’s monthly mortgage bill by $136, representing a material increase of 8.6%. Such an increase would be the equivalent of a 75 basis point hike in interest rates to someone who would have otherwise gone for a 30-year amortization period. The Ministry of Finance’s own figures show increases in monthly mortgage payments ranging between 9.0% and 12.5% (depending on interest rate assumptions). Viewed another way, the shorter amortization period would require the qualifying income needed to purchase a home — i.e., the income threshold under which homeownership costs (mortgage payments, property taxes and utilities) exceed a ratio of 39%, as per the new GDS rule — to rise by 6.7% (from $62,970 to $67,160). In effect, this will raise the barrier to entry into Canada’s housing market.
Given that first-time homebuyers rely proportionately more on longer amortization periods — last year, 40% of new mortgages were amortized over periods longer than 25 years compared to 25% for total outstanding mortgages, according to a survey by the Canadian Association of Accredited Mortgage Professionals — the new rule will dampen first-time homebuyer demand in Canada.
The change to the amount of refinance will more directly affect the financing tools available to consumers. (Consumer spending will also be impacted indirectly by the shorter amortization, as the higher mortgage payments will reduce funds available expenditures other than housing.)
We expect the new caps on GDS (39%) and TDS (44%) to have little impact. CMHC already applies more stringent maximums for riskier borrowers (35% GDS and 42% for credit scores below 680) and has the TDS ceiling of 44% in place for lower risk borrowers. The only change for CMHC will be the application of a 39% GDS maximum for the lower risk borrowers.
Finally, the new limit of government-back insurance coverage to properties valued at less than $1 million could, at the margin, cool demand for the high-end market segment; however, the proportion of high-ratio mortgages in that segment is likely small.
The separate announcement today by OFSI provided federally regulated financial institutions in Canada with the final guideline on residential mortgage underwriting and practices. Focusing more specifically on financial institutions’ internal procedures, the guideline aims at ensuring that strict controls are followed, and disclosure and monitoring are enhanced in the mortgage business. We expect little material impact on the housing market in Canada arising from the final guideline.
The new rules announced by Finance Minister Flaherty today came as somewhat of a surprise given that Canada’s housing market was not demonstrating signs of overheating for the most part. We remain of the view that the market is in transition to a moderate and sustainable path. As is often the case when rules are changed, the new rules are likely to set off some kind of a stampede in the next few weeks of purchases’ looking to take advantage of the current terms. Past July 9, however, the new rules are likely to restrain homebuyer demand, particularly from first-time buyers. We would expect this restraint to accelerate the process of moderation in housing market activity; yet, we do not foresee any serious correction threatening the stability of the market. Canada’s housing market will continue to find support from an expanding economy and the growth in employment and household income that this will generate.
Please call The Tony Marino Team of Royal Lepage Top Producers Real Estate at 204.942.2583 or visit us at www.TonyMarino.ca
