We received a memo this week from a large brokerage. We'll keep their name under the rug in case they don't want the publicity. It talked about what to expect once the government's new loan-to-value and amortization limits take effect. We thought we'd pass along it's more salient points.
In no particular order:
- A fair number of Canadians currently rely on 40-year amortizations and $0-down programs to qualify for a mortgage. The source suggests the upcoming absence of these programs will reduce demand for housing temporarily (but not substantially).
- The federal government's move may stimulate price competition among insurers. That's because #3 insurer, AIG, as well as lower tier insurers, may have to cut premiums to maintain market share (a lot of AIG's share is currently attributed to 100% financing and 40-year amortizations).
- "Opportunities will emerge" in the "Alt-A" and "B" lending markets as insurers pull out of this segment. For example, a lender with investors (i.e. a way to securitize its mortgages) may find it attractive to cater to folks with 580-619 credit scores. People with these scores currently qualify for insured mortgages in many cases...but not for long.
- According to our source, "The Banks will be the first ones to start promoting non-prime and Alt-A as their conduits are still operating and it’s a market segment they would certainly like to ingest."
A few more thoughts from our end:
- The median Canadian family makes $66,343 a year according to the last census. Other things being equal, that's enough to qualify that family for a roughly $328,300 house--if they choose a 40-year amortization. (assuming prime rate and $3,000 a year for property taxes and heat)
- If, however, the family can now access a 35-year mortgage at most, the maximum they can qualify for drops to $312,615.
- The moral is, if you need a 40-year amortization or $0-down loan, buy soon. 5-6 lenders have already pulled 40-years and $0-down mortgages from the shelves, and the other lenders could do so at any time as well (even before the October 15 transition).
- Don't be surprised if a lot of people start thinking this way. In fact, it could actually create a small rush to buy in the short-term.
- In the medium-term, the changes could potentially have a slight negative effect on house prices for the reasons alluded to above. (i.e. people on the fringe can't qualify, or qualify for as much)
- Long-term, the changes could either help the market (by encouraging more conservative lending) or hurt it (by forcing marginal borrowers into pricier extended financing methods).
- All this said, experts predict the impact to borrowers will be reasonably small. TD economist, Pascal Gauthier, for example, notes that the average Canadian's mortgage payment would increase just $55 a month with a 35-year amortization, versus a 40-year. (via Ellen Roseman at the Star)
