Mortgage Rates & Mortgage Broker News in Canada

Mortgage Rules Help Fuel Rent Hikes

Young adults have to live somewhere. And when they outgrow their parents' house and join the workforce, the choices are typically to rent or buy.

But for many first-time buyers, the choices narrowed last July. That’s when Ottawa reduced the maximum allowable amortization and gross debt service ratio on insured mortgages. This immediately made it harder for younger buyers to qualify.

Because 80% of first-timers need mortgage insurance (and therefore have to play by insurer’s rules), that put many home ownership dreams on the back burner. In fact, the Canadian Association of Mortgage Professionals (CAAMP) estimated last fall that almost 17% of high-ratio borrowers would no longer qualify due to the last few rounds of rule changes.

As a result, tens of thousands of would-be purchasers have been (or will be) forced to rent, or stay renting. And with that jump in rental demand has come an expected byproduct: higher rents.

OSFI Considering Mortgage Amortization Changes

Federal policy-makers are exploring additional mortgage rule tightening, CMT has confirmed.

A spokesperson from Canada’s banking regulator, The Office of the Superintendent of Financial Institutions Canada (OSFI), verified that it is looking at the issue of limiting amortizations to 25 years on conventional mortgages (those with 20%+ equity). Currently, those “low-ratio” mortgages can have amortizations up to 35 years.

Death Sentence for Extended Amortizations?

Housing commentator Garth Turner cites insider info that long-term amortizations are about to go extinct, at least where the federal government has jurisdiction.

In a blog post today, he writes:

Not All New Rules Are Old Rules

In the last four and a half years, federal regulators have instituted more than two dozen mortgage-related policies and regulations. It’s a well-intended attempt to engineer a market correction (the proverbial “soft landing”) and add stability to the housing market.

“Enough is Enough”

That’s the title of a commentary by PricewaterhouseCoopers (PwC) about the federal government’s repeated mortgage rule changes.

In its recently released Consumer Lending Survey, PwC says:

Housing Won’t Bounce Back So Quickly This Time — Dunning

How many times have we heard analysts imply that home sales will bounce back from mortgage rule changes within two to three quarters? This has been a common assertion from people who downplay the consequences of the July 2012 mortgage rules. But one man says that it’s an argument not grounded in fact.

“I think economists have just totally misread what the numbers are saying to them,” housing analyst Will Dunning told CMT.

More on the New Bulk Insurance Restrictions

Last week’s federal budget included few mortgage changes. One exception was a new proposal to restrict the use of default insurance on low-ratio mortgages (i.e., those with 20% or more equity).

The Department of Finance says it will gradually prohibit lenders from bulk insuring low-ratio mortgages unless those mortgages are part of a CMHC-backed securitization program.

In addition, the government said it eventually intends to prohibit insured mortgages from being used in any non-CMHC sponsored securitization program.

Here’s what this may mean to borrowers and lenders…

IRD Clarity Has Cometh

In March 2012, the Financial Consumer Agency of Canada (FCAC) announced improvements to the disclosure of mortgage prepayment charges.

Those improvements were designed to make life easier for people needing to assess the cost of an early refinance or mortgage termination.

The first set of enhancements arrived by last September. Among other things, they required banks to develop online educational material about IRD charges and online prepayment charge calculators.

The final measures came into force just this month. As a result, banks will now be providing:

CAAMP: Major Job Losses From Amortization Change

Killing 30-year amortizations on high-ratio insured mortgages was a move that some criticized and some applauded. But few could measure the potential side effects when the decision was made last July.

But now, Will Dunning, Chief Economist at the Canadian Association of Accredited Mortgage Professionals (CAAMP), has put out data that quantifies one of the risks. That risk is to employment.

In a recent report presented to Ottawa officials (and made available to CMT), Dunning concludes that a stunning 190,000 jobs will be lost between 2013-2015 due to the maximum amortization being cut from 30 to 25 years.

CMHC’s Insurance Volume Dives 37%. The Repercussions

The new mortgage insurance rules were intended to affect “less than 5% of new home purchasers.” That was Finance Minister Jim Flaherty's estimate from last June.

So far, he’s been pretty close to the mark. In the three months ending September 30, CMHC’s insured-purchase volumes are down 6%. (That drop isn’t due entirely to the rule changes, however.)

What Flaherty did not publicly predict was the extent to which high-ratio refinances, conventional securitized mortgages and smaller lenders would be impacted by Ottawa’s changes.

Spring Market Will See Effects From New Mortgage Rules

MCAN, a MIC and part owner of mortgage lender MCAP, says it has positioned itself for weakness in the housing market.

In its recent earnings report, MCAN writes, “…Regulatory changes have resulted in some downward pressure on (home) price points in our core markets…”

The company adds, “We expect the impact of these new regulations to become more pronounced into the spring of 2013.”

Factory Lending

Some of the new mortgage policies decreed by Ottawa are bad for credit unions and their customers.

That’s the gist of this report recently issued by Canada’s credit union system.

Among other things, the Credit Union Central of Canada (CUCC) says the federal government’s rules promote “commoditization” of mortgages and fail to allow for low-risk lending that falls outside of regulators’ defined guidelines. The paper—one of the more publicly critical essays on federal mortgage regulations—suggests Ottawa’s rules essentially result in “factory lending.”

CUCC floats some compelling ideas on a wide swath of mortgage topics. These are the highlights (our comments in italics):

Ottawa May Get What it Wants…and More

Back in the spring, the feds were wishing that housing wasn’t so hot. They wished that mortgage growth wasn’t so robust. And now, CIBC chief economist Avery Shenfeld is telling us: “Ottawa has to be careful what it wishes for.”

Shenfeld issued that warning in this report released last week. He was, of course, referring to federal mortgage policies aimed at slowing residential real estate.

Some believe the extent of those policy changes (new high-ratio mortgage rules, new OSFI restrictions, new securitization and insurance limits, BASEL III, IFRS and so on) reflect a federal government playing with fire in the housing market. Others feel the measures are necessary to put out the fire, and prevent future ones.

Either way, stricter mortgage lending will take a bite out of economic growth. The country has just seen GDP fall for the first time since February (not a trend yet), in addition to posting a 15% drop in YOY home sales. There is certainly no reason to panic, but at the same time, no one knows where the housing slowdown, or its economic ramifications, will end.

Today is B-20 Day

No, B-20 Day is not some obscure holiday. It’s the day that banking regulator OSFI required most federally-regulated lenders to comply with its B-20 mortgage guidelines.

The effects of these guidelines are visible already. A host of lenders have announced stricter rules on things like conventional mortgage qualification, self-employed income verification, borrowed down payments and cash-back mortgages. Albeit, some implemented these changes well ahead of today.

In essence, it is now tougher for many borrowers to get mortgage financing.

The twist here is that OSFI regulates banks and trusts. Yet, even non-banks are impacted by all this.

Mortgage Rule Impact

People are itching to know what short-term damage the new mortgage rules will inflict on real estate prices.

So far, in the first full month of tighter insured lending, home sales are down almost 6%.

Additionally, we hear (anecdotally) that insured mortgage application volumes are noticeably lower, even after accounting for seasonal adjustments.

CREA economist Gregory Klump says, "The broadly based decline in August sales activity suggests that some buyers may no longer qualify for a mortgage now that amortization periods for high ratio mortgages have been shortened."

The HELOC Clock Starts Ticking

If you want a HELOC or readvanceable mortgage equalling 66%-80% of your home value, be ready to act soon.

We’re hearing that some banks may start cutting back on their HELOC lending limits by the end of this month.

These moves relate to OSFI’s new B-20 underwriting guidelines, which require federally regulated lenders to limit new HELOCs to 65% loan-to-value (LTV), from 80% today.

Banks must comply with this new guideline by the end of their fiscal years. That makes the official implementation deadline October 31, 2012 in most cases. But don't count on lenders waiting until then.

OSFI Rules Spell Opportunity for Some Credit Unions

Credit unions in some provinces will soon get a leg up on banks and other federally regulated financial institutions (FRFIs).

That’s because some of the key mortgage restrictions in OSFI’s new B-20 underwriting guidelines may not apply to them. Reason being, OSFI’s guidelines are drafted for banks and federal trust companies, but credit unions are regulated provincially.

While some provinces may apply OSFI’s rules anyway, others will not. Some credit unions in the latter provinces could therefore snatch some market share from banks.

The CU advantage may be greatest in the eyes of customers who seek:

New Mortgage Rules Kick In

Effective today, mortgage shoppers with less than 20% equity are subject to the new mortgage rules announced recently by the government.

These regulations will cut buying power and refinance ability for a minority of Canadians.

If these changes shut you out of the market, and if renting is not appealing, you don’t have a ton of options.

One alternative is to buy with a strong co-borrower. Another is to get an uninsured mortgage. But the downsides of those are higher rates and limited loan-to-values (Uninsured lenders typically don’t allow LTVs above 85%).

For those of you with mortgages already, these regs will end up pinching a few of you who renew or refinance. Here’s our story from today’s Globe and Mail on that:  New mortgage rules could make switching or refinancing tougher.

Mega Credit Unions Coming

Ottawa is letting credit unions break free from their provincial boundaries.

New federal rules will spawn CUs with operations spanning from coast to coast, just like our major banks.

The regulations that permit this are currently up for a 30-day industry review.

Once those regulations come into force, mortgage customers can expect:

Newton’s Third Law of Housing

It was 325 years ago that Sir Isaac Newton wrote his “third law of housing.” (Or was it “motion?”) 

Whatever. Either way, he concluded: “To every action there is…an equal and opposite reaction.”

In real estate, this principle applies routinely.

One action that’s currently shaking up housing in Canada is the government’s move to further restrict mortgage lending.

And one reaction that will be carefully watched is the impact on renters.