This morning the Federal Department of Finance announced that the maximum amortization for CMHC insured mortgages will be reduced from 30 years to 25 years on July 9, along with a few other changes. We've been expecting this change for quite some time, the only surprise for me is the short deadline. The government expects the changes will affect less than 5% of home buyers.
The other changes announced include:
- Lowering the maximum Canadians can borrow against their home from 85% to 80%
- Fixed maximum gross debt service ratio to 39% (percentage of income available for mortgage payments) and maximum total debt service ratio to 44%
- Limiting CMHC insured mortgages to home purchases less than $1million
The changes are actually quite small, and we don't expect them to have much of an impact on the market in Edmonton.
The other mortgage related change came from CIBC... They are winding down "Firstline" mortgages unit which means if you want a mortgage through CIBC you won't be able to go through a mortgage broker, only their in house specialists. The Royal Bank and BMO also only take mortgages through in house brokers or specialists.
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Sara MacLennan is the Director of Marketing at Liv Real Estate and a licensed Real Estate Associate. The bulk of Sara’s experience and wealth of expertise lies in on-line technology and marketing both for agents and consumers. Sara is the former National Director for Interactive Marketing for Coldwell Banker Canada where she was responsible for an extensive training program traveling to offices across the country training agents and brokers on marketing and technology. Find Sara on Twitter @edmontonblogger.
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POP !
It looks like the FEDs are also slamming the door shut on some other “shady” practices of lenders. I know a few individuals who required the below mentioned practice to get their mortgage qualification.
From GT’s Blog:
“OSFI – the bank regulatory cop – has published those new regs I told you about back in March. They require a heightened level of diligence on the part of lenders, and disallow cash-backs (bribes) as down payments. Just be glad you are not selling condos in Toronto this week. Details are published here. — Garth”
link to osfi-bsif.gc.ca
Having witnessed since 2006 many individuals purchasing (not speculating or investing) houses with 0% down and 40, 35 and 30 year amoritzed mortgages because they needed the monthly down payments to be “XXXX” amount, otherwise they couldn’t afford the house they wanted, I am extremely happy to see the government reign in what they originally loosened (to create a credit bubble and keep Canada’s economy going through debt), because clearly the average Canadian is not able to reign in their own debt.
Having high house prices doesn’t help anyone, having affordable housing helps the average canadian so they can spend their hard earned money on other items for life and perhaps even save some money for the future, instead of living a life of debt slavery.
Debt is good if it is making you a return and the risk is relative to that return. Having huge debt to have a home doesn’t help many people.
The speed of implementation on this one is interesting, the past changes had a 60 day period prior to implementation. 40% of the Canadian market currently opts for terms that exceed 25 years – though if there were a stat for YEG specifically it may be higher/ lower. I think the change takes some first time home buyers out of the market, so I guess we’ll see if migration offsets that.
Ahead of previous changes we’ve seen bumps in sales so maybe we see higher sales ahead of implementation and a temporary slow down afterwards.
The Gov’t has gone full circle, reversing all the changes since 2006 when the allowed 40 year/zero down mortgages. I think if they’d not made those changes in 2006 homes would be more affordable then they are today.
Initially the Gov’t was considering making borrowers re qualify upon mortgage renewal…glad that didn’t go through as imagine the ensuing gong show
They were stupid to bring those rules to begin with! Now they are pretending to be smart to take this back. They should have not created this to begin with!
So the government got millions of people into 35 and 40 year mortgages at the peak of prices, and now is going to screw them all.
This new change in policy will cause mortgage payments to increase upon mortgage renewals and at the same time will cause house prices to fall.
How exactly is this going to help those Canadians? It’s going to increase foreclosures.
Canadians will be forced to put more toward their mortgages every month. If they have high interest debt such as credit cards, they may now not have any available money in which to pay it down. Thus, they’ll go further and further into debt.
Conclusion: any time the government gets involved in ANYTHING they make a huge mess.
Not to worry GM. If you had a 35 or 40 year amortization, I believe it stays. Only new mortgages will have to qualify for max 25 year period. If somebody has heard otherwise, please set me straight.
I caught a mortgage expert on CBC a couple of hours ago. He said he was a little unclear if those who took 40 year mortgages would have to renew at 25 year terms. I think more of a concern will be if the home value drops by renewal time. The homeowner would than most likely be required to cough up the balance. He suggested that this is a great reason to save your pennies and get out of debt ASAP. Probably what the govt is also hoping as personal debt in this country has gone to dangerously high levels. But Than they created this monster but as usual, those taking on the debt make the final choice and have to live with the consequences.
Louie, I don’t know why the mortgage expert would be unclear. It’s now the 3rd time this scenario has happened in the last 31/2 years. They do not have to renew at 25 year terms, unless it’s a new mortgage.
There is also this idea that floats around every time this happens, that people who’s homes are worth less than they bought it for, somehow have to make up the difference. The only way that would happen is if their lender (usually a B or C lender) goes out of business and the homeowner would have to get a mortgage from a different lender, which would want an appraisal done. If the house is appraised as lower, the owner would have to make up the shortfall in order to get a mortgage. There were some well advertised cases of this in Calgary I believe, during the U.S. mortgage meltdown, as sub-prime lenders went out of business daily. Some of those companies offered mortgages in Canada to people with low credit ratings and even though the people never missed a payment, they lost they’re house because they couldn’t come up with the shortfall.
As long as an individual doesn’t add on to their mortgage or tries to refinance, the renewal process should be simple. CHMC insurance is bought for the original amortization period.
I took out a 35-year mortgage for $94,000 back in 2010 and have since increased my bi-weekly payments by $36 and do make a point of showing up at the bank to make small lump sum payments of between $200 and $400 each time every 2 to 3 months. The result of all this is that my remaining amortization is now only 22 years, and I’ve only lived here for a little under 2 years. The point being that it doesn’t take a lot of effort to get your amortization down. An increase in my mortgage payment of $36 bi-weekly isn’t going to hurt me at all. If it did, I’d have to wonder if I was ever really able to afford my home at all.
But do remeber when your 35year mtg comes up for renewal, you cannot switch banks for a better rate as other bank will not be able to offer you anything more than 25 yr amort.
I’d argue the Gov’t caused the prices to peak with loose lending policies, it’s the chicken and the egg.
Itchy, you are correct that the change just affects leveraged (less then 20% down mortgages). I’d expect the majority of 25 year plus mortgages are leveraged. Overall 68% of Cdn mortgages are insured (according to the CMHC). I’d guess a lot of People with big downpayments would be less inclined to use a really long amortization
people need to be responsible for their own decisions. If I go to Colombia (I have) and get kidnapped (I didn’t, but a friend did), is that Air Canada’s fault for flying there?
Please……people have been flaunting and throwing out hundreds of thousands of dollars of debt like it was monopoly money the last 5-6 years.
You reap what you sow. If a person is stupid enough to get a 40 year, zero down mortgage, they need to know that is not buying, but renting from the banks.
If the govt hadn’t introduced the 40yr amort in the first place there would not have been bidding wars in 2006 and 2007, By increasing amort, customer got the power to bid more than what a 25 yr could afford. Gocernment is entirely to blame for bringing in the 40 yr amort and they realised the mess they had made and decided to return it where it was supposed to be. Government needs to place the proper legislations to prevent people from hurting themselves. It is very similar to drunk driving, if people are allowed a higher level of alcohol in their blood they will drink more and crash more so govt need to regulate the amount of alcohol one can consume.
At the time the govt really thought this was a bright idea. Affordability drops by close to 10 percent by reducing amort by 5 years with the same income and same interest rate.
I had heard some time ago that there was going to be some tightening of rules around HELOC’s as well. Many of them are wirrten that you only have to pay the interest per month. Even though we haven’t used ours in years, that was the way it is written. I had heard that they were going to implement a rule that the monthly payment would have to include interest as well as some principle – more along the lines of a traditiional mortgage . The reasoning was that many people with HELOC’s are not paying them down – only covering the interest. Didn’t hear anything about those rules changing .
That is exactly what millions of Canadians are doing.
They take out HELOC’s on their homes, maxed out to as much as they can possibly get – and use that money for investments. That way they make a reasonable return PLUS get a tax deduction on the interest paid. At the end of a year they end up with more money in their bank account AND they get a nice tax deduction so they pay less tax. Win-win.
I believe this is the real reason the government is trying to reduce our debt levels. They are getting less tax coming in as more and more people are doing this. Gotta put a stop to it.
The gov’t never does anything out of kindness and benevolence for the people of Canada. They’re in it for themselves. Period.
I don’t know anyone who has taken out a Heloc for investment purposes but I know dozens who have taken out Helocs for toys, trips and living the good life. Therin lies the problem and is exactly what transpired in the US during their housing boom. That’s where the expression using your home as an ATM comes from and Canadians have been indulging like crazy.
As far as I know, HLOC between 100k~300k are very common to help with stock investment. You can’t possibly recover the stock loss in 2008 without fresh cash injection from HLOC into the stock market.
“I had heard that they were going to implement a rule that the monthly payment would have to include interest as well as some principle – more along the lines of a traditiional mortgage.”
If true, that’s the dumbest new regulation I have heard in a while. The whole point of HLOC is to take out money when needed. It’s not a refinancing. You can take money from HLOC out multiple times.
If, say, previously you pay $500 in interest from HLOC every month, and now the new rule requires $500 in interest plus $300 in principle, all you need to do is to take out $300 immediately after to beat the rule.
Overall, good thing that the announcement is made prior to my purchase of a lot. I will have more bargaining power now.
Anyone surprised by this hasn’t been paying attention.
All of the warnings by Carney to reign in debt have largely been ignored.
They are shooting little holes in the balloon with this and some possible new OFSI rules rather than raise rates. They know the balloon needs to come to earth, and they are trying to make it land softly.
There are HELOC provisions in the new rules, but none are related to minimum payment. The new rule is you can only take a HELOC up to 65% of your homes value as opposed to the current 80%. So on a 400K home you need to have at least 140K equity in it before you can borrow on the equity
You can still take your equity out up to 80% through refinancing or a second mortgage, but have to qualify under the new rules (meeting debt ratio requirements is now a requirement on all CMHC Mortgages).
I think this makes things more difficult for some investors who use equity in house A to buy house B to quickly build a real estate portfolio (many wouldn’t qualify for a mortgage based on the 39% DSR rule)…it also makes the Smith manuever harder to achieve as there will be less money available.
Don’t think the effect on prices will be immediate as it will front load some demand (i.e. if you get your mortgage/HLOC approved by July 9th your good, so anyone who is at the margins and wants a house may make a descion more quickly). Any impact will probably show up in the fall.
Curious for those who are currently in the process of buying a place, does the process of buying (taking procession) have to be before July 9th or is it just that the paperwork has to be started before July 9th?
Somebody else made a comment that they should stop ownership of property in Canada to people who are not Canadian citizens. Seems like a good idea to me. It would reduce property prices a bit.
High property prices to not help us.
They don’t help me and I own 75% of my home. They don’t help my kids, they don’t help your kids.
I don’t understand your logic. Foreigners don’t obtain the properties for free. They pay cash. And they pay property tax every year. If anything, they only bring down the debt level, because they typically pay cash and can’t get a loan in Canada.
As a self-sustained free individual, why would you expect anyone to help you? Are you on welfare?
From my point view, all transactions should be allowed, even if it’s sold to Martian, as long as both the buyer and the seller deem it as a fair trade. If it’s not your property, it’s not your business. If you would like to dictate how other people sell their property, please move to North Korea.
With now fed reserve saying they won’t raise the interest rates until late 2014 the chance of an interest rate hike here in Canada (or any significant) is very small.
You don’t control whom should be able to borrow how much by interest rates, you control that by verifying income/affordability to make sure those who shouldn’t borrow don’t. Interest rates are tied to inflation and economic growth. If there is little economic growth raising the rates will surely kill it.
Well Dont say I didn’t tell you soo….
Next year reduce maximum Helocs to 65% of Mortgage Equity based on a REALISTIC assessment of your property.
Whether its 2013,2014,2015 ….. Interest rates are going up..
More and more baby boomers will be heading to retirement, with no savings, loads of debt, most of which carrying a mortgage that in a lot of cases will be worth more than the property its attached to…
But errr umm Property prices always go up… you can never lose owning a house!
Buy now or be priced out forever!!!
If you are the person who, in the past 10 years, kept telling me that interest rate would go up, you were obviously wrong.
and the sky is falling “renting and proud”!
And you’ll keep renting after 30 years whereas I have already paid off equivalent of two houses using my rental properties! So keep renting until the prices fall (just like the sky).
wsn: I agree with you. Most buyers of $1M+ houses have a lot more down payment than first time buyers as typically they are upgrading.
Who said the sky is falling ? The only thing that is falling is Housing prices just like what’s going on the rest of the world….
OH wait but that’s right this is Canada we are different here……….
Time to buy 1M+ RE soon because CMHC is not securing those mortgages so bank would need a good down payment (20%+).
No CMHC means better price.
Doesn’t one would expect a million plus property own would have 20% down? From my own observation, usually the higher the total price, the higher the equity level. It’s the sub 200k condos would see buyers with less than 10k cash.
I suppose the idea of reducing amortization to 25 yrs is a good idea, but the timing couldn’t be worse.
Falling house prices does not help the economy, nor does it increase the taxes the government takes in. Property taxes fall too if house prices fall.
And reducing HELOC’s to 65% will hurt the profits of the banks. Less profit = less income paid to the gov’t.
With the world in a recession the timing couldn’t be worse.
falling house prices to the long term mean DOES help the economy. House prices are not going to drop to 50K a house, so don’t worry. Same thing for oil prices, when they are too high – most people hurt and a minority prosper. Too low oil prices isn’t good either.
When people aren’t spending all their money to banks – guess what? they have more money to spend elsewhere. Less profits for banks because of all the interest a family has to pay to the bank? I’m sorry to ask but are you on crack?
The timing is fine. House prices will drop (not crash) and people will still buy and sell houses.
Why do you want the majority of people to be debt slaves to bankers/rich people?
If people have more disposable income to spend on other areas of the economy, it actually is a GOOD thing. The economy grows more.
Not sure why everyone thinks prices will be affected much. Prices have been little affected during the drop from 40-30 year amortizations. Prices will be affected more by the economy and the number of people arriving or leaving Edmonton. Now if you said the world economy is headed for another recession and the Euro zone was going to break up, I would agree prices will drop. In fact I can see a classic squeeze setting up with regard to real estate in Edmonton. Rental vacancy rates are going down fast, and a lot of people are coming here. If they can’t get mortgage approval to buy a home, guess what, they’re renting. You add plenty of people who may have bought to a tightening rental market and you’ll get rising rents and a severe shortage of rental units, much like in the 2006/2007 time frame.
Also my take on the reason for this drop to 25 year amortizations is that the bank of Canada is unwilling to raise interest rates. People should not assume that once interest rates start to rise that the amortizations will stay at 25. If the market gets too soft, it will go back to 30. My opinion anyways.
There are tons of people who bought on 0/40, 5/40 and now they are underwater in Calgary.
I know two families who bought near 22x and they are 80k+ underwater.
Then they must suck at choosing properties, because the average SFH in Calgary is at its all time high again now.
So does this mean it will be a good time to invest in some rental properties as many people won’t be able to afford buying…?
I would think so. I thought that before this latest decision. The only wildcard is the world economy and is oil going to be 40 bucks or 100 bucks. Alberta has shown that it can empty out every bit as fast as it fills up!
As long as the oil doesn’t dry out it should be fine. The price always fluctuates.
I’m currently looking to buy a new townhouse or duplex, first time buyer putting down at least 10%. I think I might just wait a 3-4 months to see what happens. With a bit of luck the prices will come down 5-10k. Here’s hoping anyway.
ROB,
Statistically prices are always cheaper in the dead of winter, wait until then and you’ll have more savings and lower home costs!
I am a buyer right now as well and have decided to sit on the sidelines and see how the new rules play out for the next while. Seems foolish to be looking to buy right this instant unless you are someone who has minimal down and needs the 30 year am to qualify.
My prediction is this: the rental market will continue to heat up and low vacancies will persist for a number of years and smaller housing product (small single detached 1700-1800sf, semi-detached, row housing and apartment condos) will increase in proportion of sales. Larger ‘move-up’ housing 2500sf+ will decline.
Actually CMD, I would have thought the opposite. First time home buyers will be the toughest to qualify for a mortgage (especially single people) and people with equity already in a home will be easier. It would be interesting to hear from realtors, new home sales people what is happening on the ground 3 or 4 months from now to see which scenario is happening.
It will result in two things, people will rent for longer and save up, and those wanting to ‘move up’ will either have to settle for a smaller ‘move up’ or stay where they are. Builders will also respond by building smaller more affordable housing product.
Vancouver Real Estate News:
1993 – The bubble will burst.. Average house valued at 300,000
2004 – Bubble will burst now that Hong Kong immigration is over, average
house valued at 400, 000
2008 – Bubble will burst with US economic Meltdown, average house valued at 650,000
2009 – Bubble will soon burst now that Economic conditions worsen, average house valued at 850,000
2011 – Bubble will now burst as Olympic Over – Average house valued at 1,000,000
Doomsayers’ biggest problem is their failure to realize that paper money is constantly devaluing. If they had ever attended a Finance 101 class, they would be taught that $1 in 1990 is different from $1 in 2012.
If we use gold as a benchmark of constant value, then the Canadian real estate market didn’t move up at all in the past couple decade. Bubble? What bubble?
Of course, gold has its own disadvantages as a measure of constant value, but still better than paper/plastic. Human beings used gold for ten thousand years without major problems.
What you are talking about is measured and its called inflation. Inflation is not the measure of a single asset such as a house or gold. You can hit up the bank of Canada website and have your mind blown!
I choose not to use the word inflation, because it’s a purely conceptual term and no one really knows what is the current inflation rate.
Some people use Consumer Price Index as inflation. But that is very flawed, as CPI don’t even include housing price in the mix. Investments such as real estate and stocks usually are not in the same phase as the consumer product and wage. So, CPI is really just CPI, not inflation.
Some other people tend to treat increase in money supply as inflation. If you take the literal term, it is. But then again you need to consider the improvement of production efficiency vs. money supply growth. You don’t have much of a problem if production growth can keep up with money supply growth.
All in all, let’s just say, gold is the easiest benchmark for the sake of casual conversation.
lol, how about not.
The government can’t legislate stupidity and stupidity is exactly what has got many people in trouble with debt. People can’t say the government should do this, the government should do that. That’s the way they run in communist countries.
I know people who have bought more house than they need, put thousands into landscaping, hot tubs, etc. and never use their back yards (but it looks good), buy furniture on the do not pay until 2015 plan, lease vehicles because they can drive something more luxurious than they could afford otherwise, take vacations on the monthly payment plan.
It’s not just the mortgages that are getting people into trouble, it is all the other debt they acquire and the government can’t do anything about that. If there is a bubble and it bursts, it may be a reality check. Trouble is, it causes a ripple effect and that is what everyone is afraid of.
I think that a good crash along with higher interest rates wouldn’t be such a bad thing. I agree with the majority of the posts. But you have an increase of housing prices because of stupid people that all want to live far past what there income can actually afford for them. my outlook is that banks are a bit to blame since they will lend people out money to the point in which you would be stuck at home eating kraft dinner and beans for the first few year or two while you wait for a slight increase in pay to be able to go out and afford things again. But then theres the retards out there that see other offers such as 0 down no payments for your first 6 months on a new vehicle. And they see that the brick or leons has the don’t pay for two years. So them being such rocket scientists they go out and buy buy buy. Later down the road they get it all coming back at them at full force. Then you can think of all the asses that flip houses. I know you can make money quick at good times. But it got so rediculous too fast cause the bank would give to anyone. Now that they are getting tighter on who they lend money to everyone is shitting bricks? lol. People that have houses that are maxed out on credit that may lose there house or down grade vehicles if interest rises a couple more % i do NOT feel sorry for you. You are a adult and your made your own decisions. Do not complain and put blame on other people because of your irresponsible decisions. Live within your limits!
But the solution to problem is not a Communist type mareket intervention. It should be free market force at work. If a home owner borrowed too much, he should be bankrupt when there is a down turn. If a bank lend out irresponsibly and out of cash, it should bankrupt too. But the problem is that the banks are bailed out, as well as companies such as GM. When the goverment keeps bailing out irresponsible companies, what’s the incentive to change behavior?
FWIW, the bailouts are not the sole idea of Stephen Harper. It’s rather widely supported by Canadians. So you could say that the majority of Canadians are stupid, right?
Fact is Tax payer backed Mortgage Insurance is a TERRIBLE idea… PERIOD!
Who cares if interest rates stay low forever, who cares if banks want to lend to anyone with a pulse, none of this bothers me.
What does bother me is the fact that my taxes are going to support people who are purchasing homes they really can’t afford. Which in return increases the house prices for the hard working people like myself, who would not purchase without a 20% down payment.
We need to go back to the simple times…. if you have money you purchase “CASH” if you dont have money you rent… simple as that!
And if you can’t afford the rent then the gov’t will put you up in “affordable housing” for the rest of your life.
Welcome to Communist Canada where nobody has to take responsibility for themselves.