Mortgage Rules Tighten

“The federal Finance Department is moving to further tighter mortgage rules to address concerns over high Canadian household debt. The government announced Wednesday it will reduce the maximum amortization period for a government-insured mortgage, lowering it from 30 to 25 years, and also drop the upper limit that Canadians can borrow against their home equity from 85 per cent to 80 per cent. …
Under the new rules, mortgages amortized over a period longer than 25 years will no longer qualify for CMHC insurance, making it effectively impossible to get a highly leveraged mortgage of more than 25 years in Canada. …
Canadian mortgage rates have been near record lows for months. …
CMHC first introduced insurance for 40-year-amortizations in 2006, when it also moved to provide mortgage insurance on 100 per cent financing.”

– from ‘Mortgage rules to be tightened further by Ottawa’, CBC News, 20 Jun 2012 [hat-tips to Told-you-so and Dimitri Tishchenko]

74 responses to “Mortgage Rules Tighten

  1. This is good news. A long wait, but good news.

    • I suspect this is an opening dialog to something bigger. It doesn’t make sense to tighten lending when sales are falling.

      • You have a point there Watchdog. I think that there has been a growing realization in Ottawa though that the public was just not getting the message. Cheap rates are still a clarion call and the Realtor cabal has been milking the publics insecurity about interest rate hikes to the detriment of the whole economy. Action needed to be taken and as it is quite clear deflation is the true risk then we are set up for one hell of a correction if the global economy slows and unemployment rises too quickly. I appreciate that what you are really suggesting is that tightening of credit at this part of the cycle risks bringing on a rapid deflation of home prices. Doing nothing is even riskier though. Todays change means that first time buyers will have to reconsider the level of debt they can carry. Qualifying just got harder. This should effectively flatten the euphoria and thankfully hasten a mini correction to bring people back to their senses. Since they won’t listen to the Government, Mark Carney, the media message or any of the range of others who issued warnings…..well, they might just listen to their pocket books. So I am pleased we got this change.

      • We shall see what the official changes are soon. What I’m watching for is the effective date that will indicate how urgent it is. I still find it an odd move.

  2. As a general guideline, for a $400k mortgage at today’s rates, the move from a 30-year to a 25-year amortization increases monthly payments by about 12%.

    • 12%.
      That’s a fair amount, and will begin the squeeze.

      • Not to mention those who will soon be renegotiating from 35s and 40s having put down 5% or 0% initially. Scary… California-like resetting of what was for all intents and purposes subprime.

      • “Not to mention those who will soon be renegotiating from 35s and 40s having put down 5% or 0% initially.”

        Don’t those long amort mortgages get “grandfathered?” As of today, the max amort is 30 years but I believe those 40 year amort mortgages can still be renewed at same term.

      • @ E.G.
        I’m pretty sure “gokou3” is correct. These proposed changes will only affect new buyers and those looking to refinance. That being said, if all renewals are to be reviewed (as per proposed new OSFI guidelines), then many will indeed find themselves in a major jam once it becomes known that they have leveraged up even more and/or their financial situation has deteriorated considerably since 2008.

    • These pretzels are making me thirsty

      The problem is not 400K mortgages, it is the million dollar shacks in Vancouver and TO.

      • A $400k mortgage is still a problem if your household only brings in $60k per year.

    • 4SlicesofCheese

      I am pretty sure the reduced amortizations are for new mortgages only.

      I think most that are renewing soon would be really in trouble if they had to renew with the new shorter amortizations. This just shows how fragile peoples finances are.

  3. I thought OSFI wants to drop the LTV for LOC to 65%? So is it 65% or 80%?

  4. Didnt get why it is a good news?
    Now rich people is able to buy cheap house but poor or young couples have to wait longer or until policy changing back….

    Someone please educate me…

    • 4SlicesofCheese

      One of the reason why prices got so expensive is because they raised the amortization so high, when they lower it, prices will start to revert to norm.

    • This is a way of reminding people that home ownership is a privelage, not a right. The end of the era of easy entitlement to mortgaged housing debt is back. Instead, savings will once again begin to be meaningful.

      On that note, we might all consider that it is in fact the banks who are pressing for the current changes. The idea is to flatten demand for credit but also to fatten savings accounts which the banks need more of in order to carry out business as usual.

      All to be expected. If you have been getting pestered by your teller to set up a TFSA, open a savings account of buy GIC’s lately you will no doubt have an inkling about where your bank sentiments really lie these days and the Basel accords are part of the impetus.

    • 4SlicesofCheese

      Farmer, I was at my bank today and ALL I saw where mortgage ads.
      And this is at CIBC who has 50% of their loans in real estate.

      • Mention you might want to open a savings account…..they will drag you into the managerss office by the hair and give you the red carpet treatment to boot.

    • vanschool is correct – and so the gap between rich and poor gets ever wider

      • If mortgage rules keep on tightening like this, we will soon run out of “rich” people in Vancouver.

      • 4SlicesofCheese

        You are right, they should bring back the 40 year amortization and zero down.
        Fuck it make that interest only payments, who cares about paying it off, in 5 years the appreciation will cover all the money that disappeared to interest and some.

    • Perhaps let’s start by parsing your arguments, Vanschool; formula1:

      Firstly, when Vanschool says “Now rich people is able to buy cheap house”, what does he/she mean? That tighter mortgage rules will cause housing prices to drop?
      If so, how will that cause “the gap between rich and poor [to get] ever wider”? Please explain.

      • 4SlicesofCheese

        I think this may be a gut reaction to many first time buyers and people who have never thought about the other side of a bull market.

        You may see this news and focus only on the numbers as how they would decrease your buying power and not the real consequences intended by these changes.

        But if you do some analysis Vanschool, you can see this would keep people that really are not ready for home ownership out. Which leads to less frenzy and a sense of buying asap no matter if it made financial sense or not.

        Less than 15 years ago someone having a 30 year amortization or 5% dp would be rare and the banks would have been very hesitant to even give you that loan. There is a reason for this, and we will see the aftermath of what happens when you relax lending standards so much for so long very soon.

      • vreaa,
        you have to look at the buyer in Vancouver who needs mortgage insurance. These are buyers at the lower end of the spectrum, not higher. These rule changes do nothing to quell the detached market

      • f1 -> See the new post for discussion on that aspect of the changes.

    • The Poster Formerly Known As Anonymous

      Hi Vanschool,
      All of those “poor or young couples” can pay around 1800 a month, let’s say. They can either pay 1800 a month for 30 years (roughly 650,000 including interest). So they can buy a 420,000 house, OR, they can pay roughly 1800 a month for 25 years and pay roughly 540,000 for a 320,000 house. Which would you rather pay for the same home?

      Here is the secret that you are not told: when you are shopping for a home, you are competing against only other poor and young couples. Not against the rich and old. There are only a few of them. Most homes are bought by the poor or young who can buy only with whatever mortgage comes from 1800 a month, together with whatever downpayment they can get from savings or family. So, the seller MUST lower their prices after this change, or they will not find a buyer. So you, and other poor or young couples, will soon get to pay less for your home!!

      That is why this is great news.

      • The Poster Formerly Known As Anonymous

        soon, all the 420,000 houses will become 320,000 houses.

        And I should explain – when I said there are very few wealthy buyers, I mean there are very few wealthy buyers interested in the same home that the poor or young are interested in. They are interested in the 700,000 – 900,000 homes, let’s say. But for the same reasons, all the 700,000 – 900,000 homes will become 600,000 – 800,000 homes. So even the wealthier buyers will pay less over the mortgage period.

        Pretty good news for everyone except those that bought the home thinking they could sell it for more than they paid.

      • Ideally you are actually supposed to eventually sell for more than what you paid but not that much more than what it would be adjusted for inflation etc …

        So it is actually bad news for those who thought they would be able to sell in the short term for WAY more than they paid. Risk reward I guess!

      • Here is another reason why it is good news.

        Essentially, the price of an house in Vancouver has gone down inversely proportional to interest rates. You can think of that as a form of inflation. So, for people who have large amounts of savings, their savings are becoming completely useless for buying houses because the prices have been inflated to infinity.

        As the lending rules get tighter and the easy credit disappears, the prices move closer to fundamentals. That is a form of deflation. Now the large amount of savings have buying power again.

  5. I’d imagine we might see a temporary uptick in sales as the last of the buyers (such as they are) try to get in under the wire.

    These changes will hopefully not have too long of a lead-in time, as that may make the more bubblicious areas even moreso. In this case it may have been a good idea to announce these changes in the face of a falling market.

  6. tightenic! … pffft! …. http://tinyurl.com/7hah6od

  7. vancouversdownthedrain

    Does anyone really think this will slow down foreign investors with dubious money sources from buying up Canadian property? Of course if you’re a regular taxpayer you’re hooped.

  8. Why would the foreign investors with dubious money sources buy a Canadian property if the chances are this is a fairly overpriced and already declining asset with the low rent/property cost ratio? There are lots of places where the RE prices have fallen so hard already so they might even start to grow again soon – US, Spain, Ireland. Even Australia RE looks more attractive now.

    • Precisely. Agreed.

    • 1. It’s not foreigners driving the market, it’s locals.
      2. The only thing you have to back-up your assertions about the legality of their wealth is your prejudice.

      • We agree that “It’s not foreigners driving the market, it’s locals.”
        And the whole issue about whether foreign money sources are “dubious” or not isn’t crucial to the market here. It’s a separate ethical debate that we’ve never seen as central.

  9. The shift in tone is so subtle, yet so noticeable. How many times in the past have we read articles where CMHC mortgages were described as “highly leveraged?” It seems like during the bull run CMHC was touted as pillar of stability and a sign of prudent lending.

    The sentiment is shifting, ignore a shifting sentiment at your peril.

    This is also a pretty concrete indicator that Flaherty is not in the least interested in raising the CMHC cap. Amortizations down to 25 years, and no more high leverage loans over 1m. It seems that the focus will be on lowering the CMHC balance sheets to allow the government more room to manoeuvre should things turn south in the broader economy.

    Heaven knows people won’t be able to help themselves, when debt levels are at record highs.

    Then again, isn’t the new mantra “Borrow to get ahead?”

    • “…and no more high leverage loans over 1m.”
      To what are you referring there, Burt? Something specific (that we’ve missed), or in general terms?

      • Globe and Mail just ran the same story, I quote:

        “Ottawa will announce two other changes, according to a source. It will no longer allow high-ratio mortgages over $1-million, and it will cap the gross debt service (which looks at a consumer’s total debt payments as a percentage of their income) at 39 per cent. While many banks tend not to allow mortgages over 40 per cent, there had been no official rule in place.”

      • Burt -> “It will no longer allow high-ratio mortgages over $1-million and it will cap the gross debt service (which looks at a consumer’s total debt payments as a percentage of their income) at 39 per cent.”

        Thanks, hadn’t seen those line-items in other articles, yet.
        It’ll be interesting to see how that effects the Vancouver market.
        Most sales in the $1M+ range aren’t (we’d imagine) high-ratio; but, still, a minority may be, and could throw a damper on things.
        Also, with the 25 yr amort AND the ‘hard-cap’ on gross debt service — looks like they mean business.

      • boredlurker

        It’s even better / worse than that Burt (depending on your perspective). Not million-dollar mortgages, but million-dollar purchases. Eliminates a fair number of eligible properties in both Vancouver and Toronto, and lesser amounts in the other big cities.

        It’s no US conforming limit, but it’s a start.

        http://www.fin.gc.ca/n12/12-070-eng.asp

    • CHMC insured mortgages are highly-leveraged by definition – that’s why they require insurance. The reduction in max amortization doesn’t affect non-CMHC mortgages, i.e. those with downpayments >20% which aren’t highly leveraged.

      • Mortgages that are leveraged 5:1 or 4:1 or 3:1 or even 2:1 are still pretty highly leveraged from the point of view of general investments. Try buying any other assets with that kind of leverage; you’d be seen as a cowboy; very vulnerable to a market downturn.

      • The reduction in max amortization doesn’t affect non-CMHC mortgages, i.e. those with downpayments >20% which aren’t highly leveraged.

        This is technically true, but judging from past experience, it will probably also become difficult or impossible to get amortizations over 25 years for even “conventional” mortgages.

    • I think it is even more likely that he will raise the cap now.

  10. Am I in the right country? That was a bit of a shock, actually, but the OSFI rules apparently are taking too long to implement. Proof again, in my view, that the government and the Bank of Canada underestimated how long debt crimps take to pass through the system.

    That bond rates are low, and appear to be staying low for a prolonged period, look directly related to this decision. Gird yer loins!

  11. This is damn good news.

    Slowly but surely the entire “RE is god” environment that’s reigned so long over the BPOE is being pulled apart. The bidding wars are all but gone. The media no longer treats “bubble” like a four-letter word. Overbuilding is obvious. Mortgage restrictions are increasing. General cost of living remains ridiculously high and personal debt levels are no longer that dirty little secret no one acknowledges. Open houses, at least in my experience, remain…open, and realtors are, happily, squirming.

    Today’s (tomorrow’s?) announcement is just one more reason not to take the plunge.

    Ultimately, normal everyday people, the ones who were once suckered into buying now or being priced out forever, are either A) Being forced out of contention, B) Realizing that maybe, just maybe, the “dream” of home ownership in the Best Bubble on Earth is instead a nightmare, or C) Feeling a little of both A and B.

    Now let’s just sit back and watch this snowball roll.

    • “Today’s (tomorrow’s?) announcement is just one more reason not to take the plunge. ”

      Gord, you know this is not how it works. Evil government is tightening credit to appease their banker friends, and as a result, hard working families will have to spend 12% more monthly on the same house. Therefore, buy now before you’re priced out forever. The logic of the financially and economically illiterate boggles the mind.

      • Of course there’s that. But I think there’s a time when we “bears” need to stop being so cynical. The push will obviously be on to get in there before the new regs come into effect (I like, BTW, the move where government insurance will only apply to homes under a million), but after that, the landscape will look substantially different. Would we prefer these changes *not* be announced?

  12. Wow! Read this:
    “…a complex and growing web of shadow finance involving credit creation by banks, machinery makers and concrete producers.”
    http://www.ft.com/intl/cms/s/0/c4eb7f38-a893-11e1-a747-00144feabdc0.html#axzz1yPHO6Cbw

  13. Sadly, if this doesn’t come into effect for some time, it will only serve to pull demand forward as young buyers, who won’t qualify after the changes, will scramble to get a mortgage while they still can.

  14. I know this is OT, but I just have to share it. Polygon’s new development “The Chancellor” at Metrotown has set up a sales center for another project “Moda” at Central Boulevard. Since 2 nights ago, 2 rows of chairs line up the pedestrian walk way with no one seated on them. The grand sale is supposed to be this Saturday.

  15. OK – So a late night out for me. Anyhow, interseting to come back to such interesting news. I’ve run some calculations on this. All else being equal, the first time buyer can not afford 12% less mortgage than they had before. Thus, we should see at least a falling of the bottom of the market (and also the top).

    As for where we are compard to 40 year amort? This is a 25% fall in borrowing capacity. That’s crazy – combine this with some interest rate increases and we will see some serious decline in borrowing capacity and thus prices.

    To the person who asked why this is good? For those who have no money – this is really neutral to good. Neutral because, what you will be able to buy will come down in value to match your reduced borrowing capacity. It will be good because you will not buy now and you will have less debt – thus you will get the same place for less – That is the equation. for those of us with excess money to purchase – this is the start of what we have been waiting for.

    • Yes, Zrh2yvr. What this accomplishes is slowing the price growth in housing in the bubbliest of cities and bringing back some discipline to the market. Better to do it by policy moves than wait until the damn thing just blows up on you anyway.

      So maybe it is not a stretch to call these moves proactive even if they are a bit late in the game. It does not surprise me that the sudden shift in attitude has followed on the heels of the G20 meetings by the way.

      Something tells me that a few folks had an epiphany after meeting face to face with the other attendees who have already seen their own R/E Titanics breach an iceburg and sink with most hands on deck lost.

      I mean…this was a sudden shift. Odds it is not G20 related?……….. Zero.

  16. Typo

    the first time buyer can NOW afford 12% less mortgage than they had before

  17. I see this as a good news, but really feels to me like a fire fighter who starts fire all over the city just so that he can put them out.

    Does anyone know what reason the finance minster gave for introducing 40 years amortizations in the first place. Really who told him it was a good idea?

    • It is very common in markets for lending to get more lax as prices run up in a bull, and participants get more confident. Witness the lowering of margin requirements as the .com bubble expanded.

  18. Even the bears here haven’t mentioned something something (although I know you know… hope you know anyway).
    Total cost of that house drops dramatically. I ran the numbers at RBC mortgage calculator.
    All at 500K loan, monthly payment, 5% for entire amortization, although that isn’t available it simplifies the math. The only variable is the amortization.
    Years, monthly payment, total interest paid over full amortization.

    40 year, $2394, $649,128
    30 year, $2668, $460,640
    25 year, $2908, $372,406

    So that home that you pay $550K really costs you $1.2 million under 40 year, just over $1 million with 30 year, and only $920K at 25 year. The only people a long amortization help are speculators who have no intention of keeping the place.

    • Actually it should be agnostic to amortization length. Funny, the government mentioned the total mortgage interest calcs in its reasons for reducing amorts, but they should know it doesn’t make any difference in principle. What they are doing is forcing a higher savings rate, it has nothing to do with interest payments.

  19. See new thread, 21 Jun 2012, for ongoing discussion of the mortgage rule changes.

  20. Pingback: 1918 UPLAND DR Vancouver Real Estate Find Your Dream … | | Vancouver Realty News BlogVancouver Realty News Blog

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