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)
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