We interrupt the current programming to bring you this breaking news. According to CTV news the Federal government is making significant changes to some controversial lending protocols in Canada. The main change is the elimination of the 40 year amortization, the second amounts to the elimination of O% down mortgages being eligible for mortgage insurance.
To be completely honest this has sideswiped me somewhat as I was not even aware these changes were being contemplated. My first thought is right policy, wrong timing. My second thought is what impact will this have? Apparently, according to CTV, the impetus for this is to prevent a U.S. style melt down. If that’s their motive for these changes then Its probably too late.
I personally like the changes, I’m just a little uncertain as to the timing – why wasn’t it sooner in the year when the housing cycle was beginning its upswing of activity? The reality is the rules are the rules, and the demand will be what it is. So if fewer people (according to the rules) can buy then its good news to the rental market, but overall I suspect the impact will be reasonably minimal.
The impact of this move is also lessened by the fact in Edmonton now that housing prices have become more affordable than last year. One of the reasons the 40 year amortization period was brought in was to deal with the rapid acceleration of housing prices, and since that isn’t the case anymore it may not be needed anymore.
Across Canada though the changes should have a definite impact. The elimination of the 0% down insured mortgage will affect the lower tier of the market and then the move up market. I’m not sure of the benefit of this if the buyer can meet the TDSR (Total Debt Service Ratio) required and can afford the payments what does 5%. I’m no actuary but I’d bet the percentage of defaults of 0% down to 5% is minimal at best.
This move will stir some activity prior to its implementation deadline (October 15) as some buyers who are currently in the market act to take advantage of their situation, but I would have to think the pent up activity caused by this would beminimal. There may be a more significant flurry of refinancing activity as people who are carrying a number of unitended long term hold investment properties act to lower their payments as much as possible to make riding the market out a little more palaple.
Maybe this is a new trend for this regime though just like the changes in income trusts. No discussion just action. I’m not sure what’s worse – bad rules or the thought that the rule will constantly change without discussion and without warning. We’ll have some more thoughts about this over the next few days.
This is going to really hit the Condo market. Almost every condo project in Alberta/BC rely on 0 Down 40 year mortgages for financing pre-order flippers or the “cheaper to own than rent” crowd.
Nate
At least try and post something that has a grain of truth to it.
This is kinda mixed news. I seem to remember, but cannot find at the moment, an article and many posts about the fact that the majority of new mortgages in Canada over the past couple years have been 40 year mortgages with minimal to 0 down?
If I’m wrong on that, please correct me.
If that is the case, I think we will see an influx of mortgage apps to beat the deadline followed by a sharp decline in sales due to the 5% down.
Who knows though, it could go either way.
This is going to have a significant impact on the Alberta economy. Specifically because more people have been using these products here then elsewhere because of the erosion of affordability and the very rapid price increases that everyone has loved so much.
By the looks of it there are several criteria: moving from 40 to 35; no more 0% down; requiring 5%; setting minimum credit scores; new loan documentation. I got all of this from reading the articles on the National Post; Globe and Mail; and CTV.
It is 100% the right decision to protect people from their own ignorance given what you pay in interest for these mortgages. But the timing, especially for the Alberta marketplace will not be good. And to have it hit in the fall no less.
And if this is the public release I’d love to be a fly on the wall of CMHC headquarters. There are ‘explicit’ policy changes and then there are ‘implicit’ and cultural changes. I suspect the CMHC headoffice will be going through one soon.
Overall good policy. Just unfortunate timing and a little too late. Feel sorry for those that weren’t ‘protected’ I’d say.
My 2 cents…
From CBC’s website – good article doesn’t sound like the doom and gloom like our friends to the south will be happening here….:
http://www.cbc.ca/money/story/2008/07/09/mortgage-rules.html
“The government acknowledged that the proportion of bank mortgages in arrears is stable at 0.27 per cent, “near the lowest levels experienced since 1990 and well below the highs of 0.65 per cent experienced in each of 1992 and 1997.”
I agree that going with a 40 year mortgage with 0 down is silly – even at 35 year with only 5% is a bit risque IMHO.
This is probably a good thing all things considered the reason why we saw at least a 30% decline over the past 2 years was everyone was doing zero down/ interest only loans etc. I would say (at least it feels like to me) 75% of those loans are now in default and being taken back. I really think if we had a rule like this in 2003-2004 less homes would of been bought in sold but at least in Tucson Arizona it would of significantly helped keep the market from just completely melting down.
*** Michael, our market is completely different then yours. In the last 2 years I may have had 3 or 4 zero down deals brought to me by other agents. When the market was esculating very few of the zero down offers got accepted. The majority of our speculator inventory has equity invested. Minimum 10% but more likely 20 – 25%. The elimination of zero down insured mortgages will hardly be a blip on the radar screen of buyers though. In the long term I agree its not a bad policy but you’re comparing apples to orages or should I say the States to Canada.
This may be their last chance to reignite the market. Does anyone think the buyers will fall for this? Create a situation where the sitting on the fence buyer sees their chance to get into a property passby once the new rule take effect. Typical.
If their an idiot they would fall for it. Why would a FTB jump in last minute now when he knows the price slide is going to get even worse this fall.
We are renting to a young couple with a baby and 2 big dogs. They have stable jobs, but don’t earn fabulous incomes.
They would love to own an entry-level house, but it seems daunting to save up for a down-payment.
Although 5% on a 300K house is achievable, I am not sure that this would be their best course of action.
The mortgage payments would far exceed the relatively low rent we charge them now, and the mortgage insurance could become an anchor around their necks if something goes wrong and they have to default on their payments.
They’ll probably have to be patient and disciplined to save up for a significant down-payment, and hope that prices don’t climb too much, in the meantime (or give up the dogs and settle for a lower-end condo….)
I am sure that they represent a number of people sitting on the sidelines, today, unable to get their foot on the first rung of the property ladder.
Affordability is a key issue, but I agree that 0% down and 40 year mortgages are not the right answer, since they open the door for people to really get in over their heads.
I have a question.
With the 40year / O down being canned, do you think people would be looking for an assumable? I have been told by my bank that if someone wishes to assume my mortgage they could and because of the laws changing last year in regards to assuming a mortgage I wouldn’t be on the hook if they default on payments. Anyway do you guys think this will help, as people with no down payment are looking to get into the market have now lost this 40 year/0 down option? Thoughts?
btw. great site, keep up the great work.
Thanks
*** Most likely the only reason they’ll let it be assumed is because its high ratio and there is a covenant on it. Recently I had a great property with an assumeable mortgage. Bank kept telling my client that it was assumeable without the buyer qualifying, eventhough the mortgage said otherwise. Long story short, after getting this confirmed verbally half a dozen times by the lender I asked my seller to get it in writing. Of course they wouldn’t do this. Before you let your mortgage be assumed get expert advice. – Sheldon ***
I wonder how this will impact new immigrants and foreigners on work visa’s?
It can take years to build up a credit score from scratch to meet the minimum credit score requirements. This is going to exclude these buyers from entering the market unless they have a 20% downpayment. Which is a LOT of money at todays prices.
Even with more than a 25% down payment, banks wouldn’t give a 150K mortgage to a friend of ours, a doctor from China with her own practice, who had only been in business in Canada for a few years.
She found a private lender and has already paid almost the entire mortgage off, in less than 2 years….
Without the private lender, she might still be renting.
She was lucky and is paying the same interest rate the bank would have charged, but I see a lot of potential for abuse by less scrupulous lenders.
Well, this should officially shut down the housing market in Edmonton.
In order to sell the 10000+ listings in Edmonton, 10000+ buyers will have to qualify for $350k+ assuming that they put 10% DOWN. That is from the EREB average sales prices…
Now, on average, the Edmmonton household takes in $90K a year.
How can a $90K household qualify for a $350K mortgage you ask?
The answer is by mortgaging that overpriced house for 40 years. Since it is illegal soon, that household will have to carry a 30 year mortgage. A 30 year term for $350K is at $2300 monthly plus taxes and heat. Since 30% of a gross income can go towards a house payment, Our household can bear exactly that: $2300.
We all know what $375k can buy in Edmonton: a dilapitaded bungalow in Dellwood or a newer duplex in the Rutherfords… However, who has a 10% downpayment these days when consumer debt is out of control?
Well, Edmonton needs over 10000 such households to kill off all those listings.
Can anyone here see that prices in Edmonton, Calgary, Saskatoon and Regina will crash very hard very soon has NOTHING will sell.
I sincerely wish good luck to all sellers because you need it.
Look at what $225k can buy in Winnipeg: MLS®: 2812467
Try not to panic when a $400k home in Deadmonton rots for a year before selling for $300k
Word of the day – and get used to it: NEGATIVE EQUITY.
Then they walk away and you get a sub-prime fiasco in Alberta…
ned in winnipeg,
I think your assessment is a little skewed. There are plenty of quality starter SFH under 350K. I am moving to the city in another week, I conducted a house hunting trip in Mid may. The selection was overwhelming. I purchased a 3 yr old, 2+1 bi-level, with a 2 car garage for 330K in a nice NW neighbourhood (Cumberland).
People just need to get away from the bigger houses, buy only what you need, not what everyone else has. Bigger houses do not make people happier, contrary to the societal believe that bigger is better.
Edmonton is the 5th largest city in Canada(I think??), and the housing prices reflects that.
ned in winnipeg,
I checked out that MLS listing, lets add another 20 – 25K on top for renos, because the inside of that house in damn ugly.
ned in winnipeg,
There are so many screwed up assumptions in your post I don’t even know where to begin. First of all you assume the only people buying houses are making the average wage, and the only houses available are the average priced ones. There are people who make way more than the average and some who make way less…..and there are houses available for both. Also wrong is your assertion that people will have to take a 30 year mortgage….wrong again, 35 year is available, but not 40, so what does that do to your calculations?
It would just be more honest and certainly less time intensive to say, hey I’m investing in Winnipeg and if enough of you do the same, my house will do here what it did in Edmonton from 02-07!
Itchy…
wow… 35 year mortgage. well done! (sarcasm)
10000+ listings in Edmonton. Good luck! That $450K house bought at the peak will resell for $350K soon…
BTW there are only 1500 listings in Winnipeg and 300 Comfrees for a 700000 metro population. The sales to listing ratio is at 70%.
The typical $400k house with a 5 sq ft yard in Deadmonton is worth $275k here. And there’s lots of rooms between lots and plenty of brick!
That is itchy’s “35 years” mtg compared to a 20 year mtg here.
Jobs are plenty here and the boom hasn’t done any damage here like in Edmonton.
Good luck for sellers!
Who wants to live in Winnipeg anyways? My sister in law lives there and hates it (her husband moved there for work). Winters are too brutal.
I always thought 40 year mortgages were a bad idea.
Need in Winnipeg:
If you think you’ve gotta pay 375 for a duplex in Rutherford, you’re as oblivious as the rest of your post makes you sound.
Go Jets!
Oh yeah, they left town.
Like many others from Winnipeg…
Go Moose!
ned in winnipeg needless to say has no credibility with all the absurdity he’s been posting.
Well Edmonton will probably shape up to be a rental market soon now that affordability goes up, people are already here, new immigrants and foreign workers are still coming. Of course it will take them years to even afford to buy a house, this is where landlords come in. Reality in Vancouver is that owning takes lots of years of saving, same will be for Edmonton.
ned in winnipeg,
I’m not saying a 35 year mortgage is good or bad…..only pointing out that everything you said after “Well” was full of bogus assumptions. By the way I lived in Winnipeg in 1983, I grew up in southern Manitoba, my wife grew up in Winnipeg and still has her parents living there. It’s not my cup of tea, but then again not everyone likes Edmonton either. Enjoy your house, hope you stay satisfied!
Thanks for the post. 0′s and 40′s may not have been the best thing for the consumer.
Aloha,
Keahi
Hey Ned in Winterpeg, sounds like you have a bad case of the jealous of Alberta going on. Independant study done in the Globe and Mail yesterday ranked Alberta tied for second with Texas for best overall place to live with regards to income/cost of living/ low tax ect. Delaware was number one. I’m not sure, but if memory serves I think of the 50 States and 10 Provinces included in the study, Winterpeg came in 61st. Sucks to be you. Us Edmontonians may be a stubborn bunch but the best of the best often are. Alberta will be the cash machine for the rest of Canada for a while yet. Thanks for being jealous of us, we love the compliments.
Jeff, I appreciate your comments about buying a house the size you need, not necessarily the biggest house or the size everyone else is buying.
I’ve been a homeowner in Edmonton since 1987, when I was newly married. Over the past 20 years in raising a family, I’ve bought, sold, and moved many times, and have had almost every kind of home-owning experience there is … so I feel I can comment with the voice of experience, at least a bit
New construction, renovations on older homes, condo, duplex, SFD … burbs, city. I’ve bought and sold privately, and bought and sold through realtors. I’ve lived in homes too big for me, too small for me, and just right.
Anyway, I think with all the buyers today looking for the biggest home they can get for their money, it’s wise to think about the whole “home-owning” experience. I remember when mortage rates were 14.75% … boy that was tough making those payments with small babies. Mortgage rates today would have been a dream back then!
And then there are rising energy costs to think about …. my last home in the ‘burbs had enormous utility bills, and that was before the cost of energy starting sky-rocketing. I work in environment education, and something we hear a lot now … the days of ‘cheap energy’ are over.
I won’t get into the whole maintenance issue, but if you own ‘too much home’ you are going to spend a lot of your weekends (and your bank account) on keeping things in good working order!
Anyway sharing one perspective, there are many. Owning a large home is not necessarily right for everyone. Large SF often translates to large mtce and utilities … just something to keep in mind, for all you young buyers out there, looking for the ‘best deal.’ Buy smart and right for you, not just big
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Lenders are cutting the 40y + 0% mortgages immediately not waiting for the Oct. 15 deadline.
“BUSINESS REPORTER
The Bank of Montreal and Canadian Imperial Bank of Commerce are following in the footsteps of ING Direct Canada by immediately purging 40-year mortgages from their offerings, making them the first of Canada’s “big five” banks to take that step since Ottawa decided to tighten mortgage rules.”
http://www.thestar.com/Business/article/458918
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Where do I start “ned from winnipeg”? I know your honeymoon in Winnipeg is not yet over judging by your bias comments. I recall you saying that you must get more street cleaning for the extra property taxes, good luck with that. I was born and raised in Winnipeg (moved here fall of 2005)and had a chance to move back this spring. No way. I know friends in the RE industry back home and they all consider a market that has already shed 7-10% off peak values A FAR MORE STABLE investment than a market that has been pulling in multiple offers and selling well above list for the last 6 months. A big crash is headed Winnipeg’s way. The last 6 months in Winnipeg will be like the middle months of 2007 for Edmonton.
You talk about the average Edmonton household making $90K and what they can afford, in Winnipeg, 53,176 is the average household income in the city. Eighty-six per cent of the households fell below Statistics Canada’s low-income cutoff. What will happen to Winnipeg without 40 yr mortgages and at least 5% down? Check the WFP article from yesterday. The house you pasted is in the Maples. Do you have any clue? Want your kids growing up as gangsters? If so, buy that house and they’ll have a good chance. BTW, it’s ugly as hell.
Once the demand fades in Winnipeg, which started to happen in June, multiple offers will disappear and those who bought in the last six months will find themselves in the same situation as those who purchased in 2007 in Edmonton. Please don’t be ignorant and think the entire country is melting and Winnipeg is the only city impervious to RE declines. You only have to look at the price per Sq. Ft sold in Winnipeg over the last few years to realize it’s about to go down, down, down…
Sheldon said…..”Apparently, according to CTV, the impetus for this is to prevent a U.S. style melt down. If that’s their motive for these changes then Its probably too late”……
Nice to see that you finally admit Canada is in for a US style meltdown.
***you crack pots are all alike. firstly I dont think we’re in for the same as the U.S. the rest of your comment doesnt deserve a respone. sheldon
i merely stated that if that was the case which it is not tha
Sheldon said……”overall I suspect the impact will be reasonably minimal.”
Well….well…..
“A survey by the Canadian Association of Mortgage Professionals last fall found that 37 per cent of borrowers surveyed had mortgages with amortization periods greater than the traditional 25 years”
Garth Turner said “Don’t get me wrong, I am 100% against 40-year mortgages, and they should never have been allowed to flourish by Jim Flaherty (a stunning 62% of all new home buyers now take them)”
Now…..not every single mortgage goes thru a broker……so the “real” number is somewhere between those two extremes.
Yep…it will have no impact at all….heh.
***My opinion. Yes my opinion is it will have very little impact. The 40 amort was introduced to deal with esculating prices and affordability. Prices are coming down and there is no need for it. From my experience and from a number of mortgage brokers that I deal with very little of there book of business is zero down.
So you have your opinion. I have mine.
Sheldon
I’m pretty sure that calling someone a crackpot is a personal attack. Looks like Sheldon needs his civility enforced.
As a banker and economics major (I do real estate economics research at UBC), I argued with my bank’s management to not participate in CMHC’s 40yr mortgage because + 0% down because it will be morally unethical because we are setting customer up for failure. CMHC is pretty stupid to set it up in the first place. Their argument was to “improve affordibility” which is some of the dumbest idea I ever heard of. Any economist would realize that, by increasing the ability to lend, you are increasing the housing demand by increasing pool of people who can “afford” monthly payment; however, the housing supply is relatively fixed. What will happen is that this policy will drive up the price of average house, thus decrease affordibility. (40yr Mtg started around 2005. Yes around the time housing market went crazy) So …. counterintuitive wouldn’t you say so?
Secondly, when is the last time people work 40yrs consecutively? the risk involved for homeowner to not being able to pay for a few month due to various reasons is so high (let say increase default rate by 15%). On top of that, it is not like you are saving shit loads of money by increase 15yrs, it is usually a few hundred bux a month(something like 200bux). I don’t know about you but I DO NOT want to work additional 15yrs for the bank to pay off my mortgage just for few hundred bux a month.
I agree with your thoughts James, however, wasn’t the “pitch” of 40 year mortgages the idea that as your income grows mr./and or mrs. borrower – you can apply that towards your principal and effectively reduce your amortization period? Those who stick to this approach can quickly reduce their burden to the typical 20-25 year period. Then atleast for the 1st year or two of owning their home the payments are affordable and as income increases – so does your mortgage payment.
Naturally this always sounds good in theory, and people “intend” to pay off their mortgage quicker, but then a “Plasma TV offer” comes along that “I couldn’t refuse” or “we needed a newer car because our 5 year vehicle is not as nice as my neighbors…” etc… Those are the people that should not have the 40 year plan.
Ultimately, this will give people such as you and I the “leg up” because later in life we will not be tied down to payments and we should be able to enjoy more of what life has to offer!
“The price of discipline weighs ounces compared to the price of regret.”
You are right Rhettro. However, if people look at the data of income growth in the last 30 years, it tends to stay relatively stagnant and most of it gets eat up by inflation anyways. At the moment, it is cheaper to rent than buy in many cities. To be honest, the best way to build housing wealth is to get a 25yr mortgage and pay it off in 18yrs. If one cannot afford the 25yr mortgage that means one shouldn’t buy a house because the risk of defaulting is so high that one is setting himself up for failure. Try index fund instead.
I’m sure you are right about the overall effect of wages being relatively constant with inflation over the past 30 years.
I guess what I was interpreting about the 40 year plan was that you can “lock in” your mortgage payment – say at $1500/mo. – then in the next couple of years as a young person’s/couple’s income rises by a few hundred $$$ per month – put most of that towards your mortgage thereby reducing your amortization to <25 years.
Again, great in theory, I doubt it is practiced much….