More on Today’s Mortgage Changes

Mortgage-Rule-ChangesJim Flaherty says today’s new mortgage regulations—the 2nd major round of changes in 11 months—are meant to “(encourage) hard-working Canadian families to save by investing in their homes and future.”

He says the new regulations are warranted despite the fact that “Most Canadians are quite careful and use common sense in their borrowing…”

That said, there’s no doubt that debt risk has increased. Overall credit levels have climbed faster than income to worrisome proportions. Most agree it was wise for the government to step in and shield the economy from the minority of overborrowers.

Unfortunately, the government performed this debt surgery with a butcher’s knife instead of a scalpel.

That’s because, while reining in higher-risk borrowers, today’s changes simultaneously rip choice away from the majority of highly-qualified home owners. This includes Canadians with excellent credit scores, solid employment, and reasonable debt ratios (i.e. minimal default risks).

The lower amortization limit, for example, reduces the purchasing power by roughly $25,000 for well-qualified homeowners with no debt, a 4% mortgage, and $60,000 in income.

Unlocking money wallet salesIn addition, the lower refinance limit means Canadians with a $300,000 property for example, will now be able to:

  • Consolidate $15,000 less of their high-interest debt; or,
  • Borrow $15,000 less for renovations, investing, education or other personal needs

In a release today, CAAMP suggested the government has focused heavily on eliminating mortgage risk that is currently “negligible,” and will be for the foreseeable future.

Jim Murphy, CEO of the Canadian Association of Accredited Mortgage Professionals (CAAMP) says, “We understand why he did what he did…But we hope when the time comes, he’ll revisit that decision.” Murphy says real estate is vital to the economy, “and it’s crucial that we find a balance because you don’t want to overreact to temporary market conditions.”

Canada’s 90-day prime mortgage arrears rate of 0.43% is near an international low.

Murphy says, “Rather than reducing the amortization period to 30 years from 35, as the Minister has announced, we would have preferred that the government had required those people seeking 35 year amortizations to meet the same qualifying standards as those with a shorter amortization. We hope the government will revisit this one feature as the economy strengthens.”

That makes sense given that most recent debt accumulation has been prompted by temporarily low interest rates.

Not everyone is buying boats and big screen TVs with their home equity. Strong, responsible borrowers use longer amortizations to maximize cash flow for legitimate reasons. Qualified self-employed or commissioned salespeople, for example, can see large but normal swings in monthly earnings. 35-year amortizations lower their payments so they can save and weather slow periods. Others rely on extended amortizations to allocate monthly income to better non-debt uses, like investments.

In many ways, these rules are an example of “good intentions” behind bad policy. It’s not surprising that bank executives are quoted in the media applauding these regs. Certain banks will benefit in significant ways, to the detriment of consumers. We’ll touch on that next…

  1. Memo to Finance Minister Flaherty – perhaps you are unaware of a different way to address the problem as you have articulated it (i.e. people buying boats, big screen TVs, and cars that they can barely afford) that would be cleaner and more efficient for the economy as a whole:
    Raise consumption taxes (i.e. GST/HST).
    You may recall the federal sales tax was at 7% when you took office, and your government lowered it to 5%. Simply raising the tax back to this level (or beyond) would make these items more expensive and, assuming the fundamental law of economics holds, cause fewer people to buy them.
    I’ll share another exciting strategy with you, Mr. Flaherty. It would be possible to use the increased revenue from the GST/HST and use it to lower income taxes, making the whole proposal revenue neutral, while at the same time making it marginally more attractive for people to work. I believe that’s called a win-win.
    You’re welcome!

  2. As person looking to buy a home. I welcome these policies if they will help lower the price of homes to make them more affordable.
    Housing should not be an investment. Housing is shelter and shelter should be affordable.

  3. “The lower amortization limit, for example, reduces the purchasing power by roughly $25,000 for a well-qualified homeowners with no debt, a 4% mortgage, and $60,000 in income.”
    Whoop-dee-doo… It won’t reduce the purchasing power, it will lead to a decrease in asking price to meet the buyer’s demands. Remember it’s the buyers that set the price of homes, not the sellers.
    As a first time buyer looking for a home, I welcome these changes. I’m looking for a 25-year mortgage or less with at least 10% down, and I just can’t compete with these jerk-offs who are getting 35 year mortgages with only 5% down.

  4. If housing should not be an investment, then Mr Flaherty’s stated reason for the change (“(encourage) hard-working Canadian families to save by investing in their homes and future”, as quoted in the article) is bogus?
    Everyone is free to either rent or buy a home. Some people do both (buy for investment and rent where they live). In any case, the place you live in is invariably a significant expense. (Even if you own your home outright, the cost of maintenance + opportunity cost of having the money tied-up are substantial.)
    Taking away choices from responsible borrowers seems, as stated in the article, quite a blunt instrument to use…

  5. I hope they move it back to 25 years soon and raise the downpayments. Also if people are looking to draw out equity down to 10% to pay high-interest debt then they’re doing it wrong. If you want 10 to 1 leverage it shouldn’t be in your house.
    There’s no reason why buyers can’t still have a longer amortizations. I just don’t want to back them as a tax-payer that actually saves and doesn’t overbuy.
    Finally self-employed and commissioned salespeople should have saved enough of a cushion to weather slow periods in addition to their downpayment before they consider buying.

  6. Not everyone has $20,000 to $40,000 to put down on a house. I think some people forget that the cost of renting a home is comparable to the cost of owning one in many cases. Although there are different rental agreements that sometimes include or exclude certain costs, the month to month expenditure is almost the same. This means a person can have good credit, solid job and can clearly afford a mortgage, but just doesn’t have the huge sum of money to put down as a down payment. The 5% down and 35 year mortgage is a one time deal that helps a new home owner into the market and allows him or her to build on their equity. This stimulates housing development and the economy. Banks need to be more careful who they give their money to, but not make it impossible to enter into the market. This “jerk-off”, can afford to pay a mortgage and has done so via renting for many years. I just don’t have the money to put down.

  7. The glaring issue for me:
    With TD (and Scotia?) now registering ALL mortgages as collateral charges, a buyer putting 5% down is essentially married to the lender until they have 15% equity – or upwards of 7 years on a 30 year amortization (assuming purchase price holds even). Why? Because CMHC will not allow this lender to “refinance”, even if this is being done as a straight transfer at maturity to obtain a more competitive rate elsewhere.
    Now imagine what happens when home prices begin to fall…
    This is potentially going to be a massive nightmare for consumers. CMHC had better clarify their future treatment of high-ratio, collateral-charge transfers fast.

  8. 1. I predict that the 35year amortization will return within a year for first time buyers.
    2. For existing mortgages, refinance to 90% LTV will also return by the end of the year, but with a higher hi-ratio (CMHC) premium, for 80% to 90% LTV.
    3. By the end of 2011, the demand for variable rate mortgages will increase significantly relative to fixed rate or longer terms, in order to lower overall carrying costs and saving interest over the term.
    4. Prime will not rise more than 4% for 2011, so going variable rate will become more and more popular, for first-time, existing, and investment property owners!
    5. ‘Interest only” mortgage payment options would become more popular in 2011.

  9. Perhaps CMHC should pull mortgage insurance entirely and let the markets decide how to allocate risk.
    The sense of entitlement expressed in the comments above, as well as the original post, shows just how abusive of credit we’ve become.
    No-one owes you a loan or loan guarantee under any terms, least of all the Canadian taxpayer.

  10. Ha! All it does then is affect mortgage brokers and seedy real estate agents from hooking people that should save a min of 10% down payment and max 25 yr mortgages. That way the Canadian tax payer no longer has to put the back stop to all this debt spiral. Unfortunately over 5 years of Con management, too many have taken the 40 yr 35 yr and 0 down with CMHC backing. Time for you to really work for your money like they had to back in the day.

  11. 1. Morgagors are among Canada’s top NUMBER ONE taxpayers! They are most critical for driving the economy…. the more the merrier! Econ 101!
    2. Banking policy is driven to maximize $$$ flowing, and interest earning!
    3. The consumer is king (and queen) and has every right to claim what he/she is entitled to. Afterall, consumers always pay the price: it’s how a ‘free economy’ works! Econ 101

  12. 1)everyone pays taxes Morgagors are nothing special. Besides most people go to their banks for mortgages without a broker.
    2)banking policy now in the new world (ie. after the melt down) is now driven to make sure that money is not going to go down the drain never to be returned and that their balance sheets remain healthy.
    3)consumers do not have the right to claim what they want, if they can’t afford it, then they shouldn’t have it to begin with, that is the mess we are in now.

  13. If you want equity from your house than sell your house. You do not have one penny of equity until that house is sold and the money is in hand. I have heard story after story after story of Americans who had very manageable mortgages, saw their home values soar, cashed out the equity only to have the housing bubble pop leaving them with overwhelmingly large mortgages. Many of the stories that I heard came from California where the media and economists swore that there was no bubble only to see homes drop up to 50% in value a couple of years later.
    Equity can be a very dangerous thing if cashed out instead of cash in hand.

  14. Or are they somehow grandfathered, but with caveats? Like being able to renew with the same lender with a 35-year amortization, but without the leverage (for negotiations) of being able to go elsewhere?

  15. “The 5% down and 35 year mortgage is a one time deal that helps a new home owner into the market”
    I think you’ve got it exactly backward, Chris. If there were no 5% down/35-year ams (not to mention those horrible 0/40 things), prices would not have risen this high, and you would have much less trouble getting into the market.

  16. reply to Kenny
    Why should the self employed have “saved up a cushion” and not the rest of the taxpayers? Is it because your two week pink slip gives you a buffer?

  17. The suggestion for a revenue neutral trade-off between an HST increase and an off-setting income tax decrease is appealing, but would impact ALL consumer purchases subject to tax (except food and drugs, or rather medications) and put a REAL damper on the economy!
    First time buyers, who benefit most from the high ratio (95%) mortgage, will now need to find an extra 15% to put down, or buy a much smaller house. 5% of $200,000 = $10,000 which at 20% down will buy you a $50,000 house!
    So first time buyers are out of the market for perhaps a year, unless they get creative and take an 80% first, a 15% second, and 5% cash into the deal. Someone, somewhere, will finance deals like that in the private market, albeit at higher (but I didn’t say exorbitant) rates.
    Possibly rent-to-own will become more popular with ‘motivated’ vendors who can get the deal done with a 5% down payment, rent accruing against the additional 15% down payment, and complete the sale when it’s there, or if the regs change sooner.
    Will the changes be effective? Or will the collateral damage cause too much harm to the housing industry, and set us all back a few years? If the changes are in place for a short time only, then quite possibly they may be beneficial, if painful. Over a medium term they may seriously hurt the housing market. If they stay for ever, like the temporary income tax measure, we’ll eventually get used to them, and accept them, and be financially very healthy and responsible!

  18. Although my numbers aren’t quite right
    1. A 30-year maximum amortization on insured mortgages over 80% LTV
    2. An 85% LTV limit on insured refinances
    3. Elimination of government insurance on secured lines of credit (aka., HELOCs)


    the basic premise doesn’t change!

  19. If there is no bubble, who cares if amortizations are reduced to 30 years? However, what are the odds that Flaherty further tightens to 25 years? This incremental tightening of amortizations leaves uncertainty in the market. Why would I buy now if there is a chance that Flaherty will tighten amortizations to 25 years later resulting in even lower prices in the future?

  20. That’s because, while reining in higher-risk borrowers, today’s changes simultaneously rip choice away from the majority of highly-qualified home owners.
    Obviously your definition of “highly qualified” is not the same as most peoples’. If they were really highly qualified they wouldn’t need and extended mortgage with little down. And if they are highly qualified they can put 20% down and still get 35 year mortgages uninsured. Unless of course the banks stop offering those, in which case obviously the experts disagree that those people are qualified.
    The lower amortization limit, for example, reduces the purchasing power by roughly $25,000 for a well-qualified homeowners with no debt, a 4% mortgage, and $60,000 in income.
    Right. House prices will fall approximately that amount, and that well-qualified home buyer will be delighted at his good fortune for having to spend less.
    Consolidate $15,000 less of their high-interest debt
    Hopefully this will encourage them to think twice about racking up $15,000 on their credit cards.
    Borrow $15,000 less for renovations, investing, education or other personal needs
    Sure. Personal needs like a jet ski, a vacation to hawaii, or a new car.
    “Rather than reducing the amortization period to 30 years from 35, as the Minister has announced, we would have preferred that the government had required those people seeking 35 year amortizations to meet the same qualifying standards as those with a shorter amortization
    Because that worked so well in the spring, right? Everyone has to qualify on the posted 5 year rate, so in response the banks squeeze the difference between the posted and discount rates to circumvent the rules.
    Not everyone is buying boats and big screen TVs with their home equity.
    Of course not. No one ever claimed that. A significant percentage is doing that though. Heck, there are dozens of companies promoting just that on TV every day.
    Qualified self-employed or commissioned salespeople, for example, can see large but normal swings in monthly earnings. 35-year amortizations lower their payments so they can save and weather slow periods.
    You can’t seriously expect anyone to believe that someone who could not afford a 30 year term can be described as qualified.
    As has been already mentioned, that’s what savings are for. If you’re earning irregular income and don’t have a savings cushion you are insane.
    Others rely on extended amortizations to allocate monthly income to better non-debt uses, like investments.
    Fine, but why exactly does the government have to be involved in insuring that? As you say, the risk is minimal, so why not let the free market do it? Let’s see how happy they are to take over that “minimal” risk.

  21. reply to chris
    Don’t wait to buy!… amort period is not the only determinant of house prices!
    Good old supply and demand variables trump any singular factor ( or government regulation)… Besides most geographical areas show an overall dominant trend towards moderate prices increases year to year (with atypical blips here and there)….
    You may also hedge against increasing carrying costs by buying a property with some rental income potential in case you do need it in the future….. and start building equity rather than renting (if u do) !!!!! The sooner u own, the better!

  22. If the government pulled insurance you’d pay 1-2% higher mortgage rates overnight. Canadians don’t want that. People believe it’s worth the risk (which is almost nil) to keep more money in their pockets than in the banks’. If you want to see what an unbacked market looks like go to Australia where rates are 2% higher and four banks have 90% market share. You have no idea how lucky you are to be Canadian.

  23. “I just can’t compete with these jerk-offs who are getting 35 year mortgages with only 5% down.”
    You don’t want to pay market price for a house AND you want people to feel sorry for you? That’s the most absurd thing I’ve heard all day. Stop your whining already and rent.
    P.S. The decreases in asking price won’t last forever ye of great wisdom. Prices will make new highs and then people will be swearing at the government once again for needlessly restricting their purchasing power.

  24. I bet 90% of Canadians above the poverty line would disagree with you. Housing absolutely should be an investment. People rely on their home more than ever for retirement. Without the wealth effect made possible by rising prices, our economy would significantly less robust.
    These policies do nothing to help home prices long term. Prices will only fall TEMPORARILY! Why can’t housing critics understand this?

  25. I can understand your frustration. However, the reality is that the jerk-offs going for 5/35 mortgages probably have the money for a 5/30 mortgage or a 10/30 and they’re just reducing the downpayment for the flexibility of still having some money in the bank for other costs/purchases, so you’ll still likely be out of luck if you can’t compete with those buyers now.

  26. Don’t forget, the CMHC is more than just a loan-backer – it is a key tool of a national housing policy/strategy.
    Some people may not want the government backing mortgages – fine with that – but that doesn’t eliminate the cost/risk from the public purse.
    Without CMHC loans, the gov’t is going to have to foot other costs to ensure that people have affordable and accessible housing will have to come out of our pockets somehow.
    So either way, we’re all paying. It’s all about what tool we use to get the end result.

  27. Without going into micro detail, cosumption taxes are less damaging to an economy than income taxes. Taxing something makes people do less of it, and more income is better than more consumption. In addition, moderating consumption implies an increase in the savings rate, which is rarely a bad thing.
    It’s gospel among economists, and it was very difficult to find one that would support the GST cuts as they were rolled out.
    In the long run, a strong economy buoys most industry sectors, housing included.

  28. Actually would be more than 15% because the CMHC premium would have been tacked on on top. Still don’t know hat the definition of refinance is. In the old days before CMHC allowed refinances to pay out debt you could only refinance the property to pay off registered debt or do improvements. Will they still allow a refinance to 95% to pay off a first and second?

  29. Think about how houses are sold. Someone lists, and those that are interested put in offers. Comps are used to help both buyers and seller gauge pricing. The net effect is a market that very much resembles an auction where those willing to pay the highest price gets a house.
    In an auction, the value of the sales are going to be based on the amount of money the bidders have available. Long amortizations increase the amount of money the bidders have at the auction because they can use more of their future income. It also means that the total debt load of the bidders will be higher; same with the amount of total interest paid. Keep in mind we are currently seeing record high debt to income levels.
    So these changes closer to traditional lending standards will decrease the amount of money the bidders have at the auction. As a result prices will fall, growth in debt will fall and interest paid will fall.
    Bad news for those wishing to sell their houses, good news for those who wish to buy (getting the same house for less total money, even if current paymets stay the same.)
    I believe this is good news for the economy in the long run, bad in the short. High debt loads and interest payments based on long amortizations hurt people’s long term net worth. It makes them less able to be active in their later years. In the short term the process of adjusting to this new reality will cause disruptions for people relying on realestate for retirment and those in the RE industry.

  30. im one of the “jerkoffs” that would love to have a 35 year morgage with 5% down! paying 850 for rent then power which rises in the winter when you have a old place of 400 plus and other bills on top of that. saving 5 percent takes long enough when you have bills plus children five and under. dave your probably one of those people who live at your parents and work at a good job. so ofcourse your gonna be able to save that 10% fast with no bills then maybe a car payment (if mom and dad havnt bought it )

  31. This is typical agent speak. Prices are seriously over priced in major markets. Only the rise in interest rates will fix this. Hopefully, the rate increases will start in March – April at the latest. Prices have consistently gone up while number of sales have gone down. There is too much easy credit because of ridiculously low rates. Rates need to increase so that prices can correct 10%. They also need to go up now so that they don’t happen when it is too late.

  32. Does anyone else noticed that the coverage has not mentioned that 35-year mortgages are still allowed, just not with CMHC insurance? So if someone pays their 20% down the bank would still allow them to do a 35-year am, correct?

  33. These new rules exemplify why the Canadian Government continue to interfere with the personal lives of its citizens. This is a really socialisty country. Capitalism and democracy should go hand in hand, not liek this.
    Take care of the lower class and forget about the already yhard working higher class that pays most of the tazes in this country.

  34. To those that wish a large decline in RE markets, is it:
    1) You were too young to get into the market earlier?
    2) Played too conservative, missed your buying opportunity and are now hoping for armageddon in the RE market so you get another chance?
    3) Wallow in your daily lives wishing misfortune on others?
    4) Want to be a RE mogul but don’t like the high entry fee?
    Don’t be afraid of which category you fall into but let it be known, If interest rates and inflation stay low, that new immigrants continue to see great opportunity to call Canada home and the consumer feels good about their long term job and income prospects, then there is no reason for any sizable RE correction.
    All these latest moves by the government are tweaks and welcomed in some circles since some agree that CMHC’s mandate should never have extended to insuring people’s consumer debt refinances and actually welcome the government moving to eliminate such liabilities on the backs of taxpayers.

  35. Four sentences, four bad spelling mistakes! Wow, BMO must be proud of their Mortgage man! Drinking on the job or didn’t complete high school? Just wondering!

  36. Hi Jennifer, thanks for the reply.
    Personally I think everyone should have an emergency fund saved, and not use their whole savings for their downpayment. I’d like to see banks use liquid savings in their approvals (5% down, 1% emergency fund?).
    The difference between self-employed and the rest is that the rest will have EI to help get them through. (yes I know you can opt-in as self-employed now, so if you do this it should be factored in as well.) $1900/month can be a big help.
    The ’35y helps self-employed save’ doesn’t really hold water to me. The payment difference between 35y and 30y on a $300k mortgage is about $100, but the interest cost of that $100/month is $41.8k (@4%).
    If you /need/ that $100/month to survive, then I as a tax-payer feel like you’re a credit risk, and I don’t want to insure your mortgage. It’s possible you’re self employed and next year you can make a large pre-payment, but it’s also possible next year you’ll have more consumer debt and default on the loan.
    If banks want to take on that risk and charge you a higher rate, I’m good with that. They have their shareholders to answer to. I just don’t believe that the taxpayers should gamble on someone self-employed that can only afford 35y payments.

  37. :) I wish you all the best in saving for a house, but I’m glad you soon can’t get one at 35y.
    If you can’t save 5% down and pay 30y payments you should be looking for cheaper places. Even if you buy with 5% down a housing dip could wipe that out, and the only way to sell would be to show up with a cheque on closing day. Plus when rates normalize you might not be able to afford to ever leave the house.
    Leverage in investing can be a good thing, but it’s very risky, which is not something you should be looking for in your shelter. With 5% down a 5% correction mean you lose 100% without even considering the realtor fees to sell.

  38. Capitalism would be if the government didn’t back any of the mortgages. Leave it up to the banks to decide.
    The ‘government backed’ longer amortizations is more ‘socialisty’. So you should be in favour of this rule change to a more free-market mortgage environment.
    Soon maybe the government will quit interfering and we can get back to free-market 25y 20% down mortgages.

  39. Kenny, You’ve got your blinders on. Fully qualifying self-employed borrowers are statistically about the same risk as salaried borrowers. It is your argument that holds no water.

  40. “To those that wish a large decline in RE markets, is it:”
    What about people who want to see interest rates normalize and standards for government insurance return to historic standards?
    These tools of keeping home prices high hurt in other areas. Low interest rates encourage speculation and malinvestment, which distorts the greater economy. Long amortizations hurt people’s long term wealth accumulation. High home prices themselves in the absence of high wages simply siphons off a greater percentage of wealth for shelter.
    I consider losing some of my equity a small price to pay for the long term benefits.

  41. Fully qualified self-employed, it’s possible (although I’d like to see that actual stats on it).
    Fully qualified self-employed borrowers that can’t afford $100/month? I doubt it.
    It doesn’t matter if you’re self-employed or a full-time employee, if you can only afford a 35 year mortgage then you shouldn’t be buying.

  42. Excuse me, but a blunter instrument would have been to allow the BoC to raise its key lending rate. Since the health of the Canadian economy is touted by realtors as a basis for continued house price appreciation, then it would necessarily follow that interest rates should be raised in line with the strength of the economy. But the realtors (along with all other economic commentators and vested interests) would scream to high heaven if the interest rates were jacked up to where economic fundamentals dictate they should be. So there is almost a deliberate cognitive dissonance at play by the vested realtors and mortgage professionals.
    Your flawed logic is showing. Flaherty took the most precise of scalpels to fix this problem. This is the best course of action since the reality of the situation is that the rest of the economy is doing poorly and to toy with interest rates at this point would be inviting macroeconomic disaster, and so the only solution to tame what is really (aside from the bond market) the only bubble in our economy — the housing sector — is to take the sort of fringe tinkering with mortgage regulation approach that the Finance Dept. did.
    This ensures that the rest of the economy can keep inching back to stability while the housing market corrects — which it should, since it’s long overdue.
    And I’m saying this as a homeowner who purchased within the last three years and stands to lose possibly 10s of thousands of dollars in equity — better that than my job.
    At least the equity will return in 10 years.

  43. “This means a person can have good credit, solid job and can clearly afford a mortgage, but just doesn’t have the huge sum of money to put down as a down payment.”
    And this is precisely why such a person should not be a homeowner, at least not yet. The discipline required to save up 20% for a down-payment on a home is the same discipline required to be able to budget appropriately and finance all the associated carrying costs of a home.
    If you cannot save up a 20% down-payment, you haven’t shown the fiscal, financial and budgetary maturity required to own something bordering on half a million dollars in value.
    This imaginary person is better off as a renter until they reach a maturity level where they can be depended on to forecast their financial means well enough that their budgeting allows them to be able to withstand the inevitable peaks and troughs in interest rates over the course of the amortization period. Those peaks can be quite dangerous for those on the 0/5-35/40 train, since they’re typically the sort of people who aren’t financially prudent to begin with and hence prone to historically normal rate gyrations.
    Keep in mind — we’re all on an emergency interest rate diet, we have been for 2.5 years now. And we typically have short memories.

  44. Jackie Jr.
    Unfortunately these rules impact highly responsible borrowers as well. That’s a serious problem because removing choice from people who are not debt risks serves little logical economic purpose. That is just one of the reasons these regulations were not surgical. We’ll write more on this tonight…
    -rm

  45. Point taken, Rob.
    By the way, great site, great commentary. The information is great and you’re providing a valuable service. Nice to see lots of activity from other commenters as well.

  46. The bank lobby lost big!!!ITs a GREAT DAY for consumers!!!€
    1) do you really know what you are signing when you sign a HELOC? NO, because you signed the papers in the bank or in your home with a cheap “closing shop” not your own lawyer , bound to advise you on the legal implications of a HELOC.
    2) a HELOC is registered as a collateral mortgage, different from a “normal mortgage” in that the lender can re-advance funds. You use the line, pay it down, use it pay, it down,etc.
    3) With a normal mortgage if you go into default (no one plans to go into default but stuff happens in life)the lender can NOT raise your interest rate. However on a HELOC/Collateral mortgage, buried in all that paper that the “closing shop” people told you to “just sign here”, you probably signed allowing the lender to jack your interest rate up to as much as PRIME +10%, should you go into default. Perfectly legal allbeit sleezy to the 12th power.If you couldn’t pay at Prime, how are you going to pay at Prime +10%?THay are just going to suck up your equity, by charging higher rates of interest.
    4) Because of a collateral mortgage the bank has the legal right of offset….if you have other unsecured borrowings with that bank & you go into default on the unsecured loan, the bank can claim they are secured under the collateral loan agreement.
    5) HELOCS as first mortgages restrict the borrower’s choice to move to another bank on maturity, because banks will not accept “transfers” of HELOCs the same way they accept transfers of normal first mortgages. So you pay to discharge the HELOC & pay to register the new first mortgage at the new bank.
    Gotta say Stevie, Jim & Co. caught the bandits before they got too far away with the loot.

  47. I don’t know the banker guy and don’t agree with most of his numbered bullets there, but I gotta admit that it’s funny how having a working understanding/knowledge of a subject is considered a blackmark against your opinion/analysis.
    As if those with less understanding have nio vested interests either.
    Holy anti-itellectualism, Batman.

  48. Why 20 percent? Why not 35? Why not 65? If anything, over 50 would make the most sense. Anything less is arbitrary.
    I’m interested to hear why everyone seems so stuck on the 20 percent downpayment as the hallmark of a fiscally-sound buyer.
    I’m surprised by some posters’/peoples’ desire to limit people based on their failing to meet an abritrary number, only to hold another arbitrary number is high regard.

  49. Why stop at 20%? Why not require people to prove maturity and responsibility by saving up and buy a house with 100% cash in hand? That will show those greedy bankers what we are made of! Until then, consumers can live for free in the dark, clueless cave you crawled out of.

  50. The “home = shelter” is just as gross a generalization as that made by the “your home is the best investment you can make” crowd.
    It is much more than shelter and is much less an investment. It is a good that provides both basic needs, non-basic-need benefits, and, in some cases, financial benefits. It is a consummable, a luxury and an investment all in one – making it one of the most complex goods out there.
    If someone is just looking for shelter, then buying a home is likely the riskiest and least-sound decision they can make, financially-speaking and they probably should be just renting where the basic price of shelter bring much less risk.

  51. Rob,
    Correct me this isn’t correct – but don’t these changes only affect those needing CMHC support (ie., with <20% down)? The rest can still avail the 35Y amort if banks choose to continue to offer it. Wouldn't this continue to offer these 'responsible' borrower the financial flexibility of paying quickly if they so choose.
    I guess we need to closely define what an "Highly Responsible Borrower" means. Wasn't it s a norm until few years back that 25y amort was the most that was available from these banks (with few exceptions, of course)?
    Looking forward to your thoughts and new piece tomorrow. Keep up the good work.

  52. Hi Patiently…
    Thanks for the kind feedback and question!
    The amortization and refinance rules affect those with less than 20% and 15% equity respectively.
    The HELOC change affects those with 20% or more equity.
    One easy way to measure a “highly responsible borrower” is in terms of default risk. For example, someone with 10% equity, a TDS of 37%, liquid assets, and a 750 Beacon is a very small default risk.
    Someone with <= 5% equity, a 44% TDS, few liquid assets, higher than average debt utilization, and a 620 Beacon is a notably higher default risk. As this illustrates, mortgage underwriting is not a one variable calculation. Each borrower must be judged (and to the greatest practical extent, regulated) on all of their individual merits. Cheers, Rob

  53. You can’t accurately compare the situation in the states to what we are seeing in Canada. Stated income (liar loans), NINJA (No Income No Job or Assets) mortgages, teaser rate mortgages and the rest didn’t exist in Canada the same way the did in the states. We did (and continue to have) stated income programs but they are put together in a way that is a LOT safer than in the US. The possibility of a market crash happening in Canada like the one we watched happen in the US is remote at best.
    Also, it is the opinion of many posters on this site (an opinion I admit that I share) that the bigger issue is not a person’s ability to access the equity in their home, but how easy it is to get into trouble with credit cards and other forms of consumer debt (personal loans, car loans, and other forms of unsecured debt). Let’s deal with credit cards that charge 19% and have next to no qualifying rules at all (ie. any college student can get one even when they have no job or income and they are brand new to the country) before condemning a homeowner who wants to pay lower interest on his car loan! It’s becoming more difficult to finance your home and get involved in a market that can be financially rewarding in the long term while it’s really no more difficult to rack up the other debts that are the ones that really get people into trouble and have no real financial benefit!

  54. I think the point that they’re trying to make is not that the self employed borrower is not able to afford the extra $100/month but rather that they would like to allocate their resources differently. Many self-employed individuals are very entrepreneurial and would rather place their money in another investment/RRSP than have it pile up in unusable equity. Alternatively, when purchasing a revenue property this same self-employed borrower might prefer to improve cash flow than pay off principal. The point is that if a borrower is a good credit risk who’s business is it that they want to structure the loan to their advantage? Especially when one begins incorporating a business into the mix, the overall structure of one’s finances can become very complicated. Condemning the entire practice of amortizing over 35 years is somewhat short sighted.

  55. You’ve got a perverted definition of socialism if you think government support of the mortgage market is socialist.
    Government support via CMHC earns taxpayers a large profit almost every single year.
    Government support saves taxpayers from paying MORE tax.
    Government support keeps mortgage rates MUCH lower for all citizens.
    Government support encourages competition in the mortgage market by allowing non-bank lenders to compete with banks.
    Government support does all this with almost no risk. If you dispute that then you ignore all objective statistics and you clearly have no concept of how carefully lenders underwrite mortgages in this country.

  56. It is not for you to judge how self-employed people handle their finances. They (we) have a right to a mortgage just as much as a salaried worker. People who work for themselves just need a different type of flexibility.
    I shouldn’t have to remind you that self employed people create most of the jobs in this country. There is no reason to make their lives harder simply because people like you are biased against them.

  57. Well put. This says it all.
    ” Condemning the entire practice of amortizing over 35 years is somewhat short sighted ”
    35 yr amortizations are just tools, like a bandsaw. Put that tool in the wrong hands and someone will lose a finger. That doesn’t mean bandsaws should be outlawed.

  58. 90% may believe it it, but they shouldn’t. 90% believed Nortel was a great investment :) .
    Housing is a horrible investment vehicle for most people. It’s not liquid, and over the long-term has tracked inflation (ie: zero gains).
    Also think forward a little to when the baby-boomers all try to tap into that ‘wealth effect’ at the same time because their retirement is underfunded. It’s simple supply and demand.
    Although price drops /may/ be temporary, if you bought in 2006 in the US your `investment’ would likely have lost around 25%. With 5% down but 5% to sell you now have to show up to closing with a cheque for 25% of the cost. If something happens and you’re unable to make your mortgage payments you’re up the creek because you can’t sell.
    I know we’re not the US, but that doesn’t mean we’re immune to corrections.

  59. Great post by Howdy.
    Interest rates are still considered to be at “emergency” levels. That is not good. A return to normalacy for interest rates also give regular people an option to actually save money in risk free fixed income (GIC) investments which are non-existent right now. Real estate has become the defacto default option to put one’s money because of interest rates that have skewed market prices to idiotic levels.
    As for the mortgage changes – put 20% down if you want more than 30 years to amortize. If you don’t want to put down 20% then stop expecting the tax payer to take the risk for insuring your mortgage.

  60. Hi Dr. C. I think I may not have communicated my point correctly to you. I’m all for self-employment, and was self-employed myself until 1.5 years ago. I applaud anyone working to create jobs and agree they need mortgages (I hasten to say ‘have a right to’, as I don’t believe anyone has a right to a mortgage).
    What I was trying to say is that I don’t believe these mortgage rule changes unduly hurt self-employed people, nor do I believe a change back to 25 years would.
    The original article said self-employed had slow periods so needed a lower payment. I disagreed because I think anyone should have enough wiggle room in their budget to allow them to make 25y payments.
    If you can /only/ afford a mortgage by needing the 35year payments, then there’s something wrong (employed or self-employed). If your self-employed and can usually afford 25y payments except for a slow month every year, you should be saving for that slow month the rest of the year so you have a cushion.
    Finally, although in general it’s not my place to judge how /anyone/ (self-employed or not) handles their finances, when they ask me for insurance it is.

  61. Hi Paul. I understand what you’re saying, and I’m all for investing outside of a property for both employed and self-employed people.
    Once the person has enough equity in the house that the bank will accept the risk, I have no problem with them holding an interest-only loan, and investing completely outside of housing.
    The only problem I have is that I’m being asked to guarantee the loan with less than 20% down. The loan is so risky that banks themselves won’t accept it unless I guarantee it (as a taxpayer). If someone is going to ask me to insure this loan I want them getting enough equity into the house that it’s protected against corrections.
    Once you’re not asking the taxpayer to cover the loan, do whatever you choose.

  62. Hello J. I really don’t know how to reply here. I’m at a loss to see how you could see ‘government support’ as capitalistic and free-market. It just doesn’t make sense to me, so I’ll ignore that issue and focus on the other points.
    Regardless of whether CMHC is good, ‘BMO Mortgage Man’ seemed to be saying he wanted both more capitalism, and more government support. I’m simply pointing out that they are opposite.
    To your points, you may see what the CHMC does as almost no risk, but I do not. The reason that the CHMC has to insure these mortgages is that they’re so risky that the banks themselves will not take the risk.
    Sure the CHMC may be beneficial to Canada, but it’s also a big risk. As a tax payer I’d rather see that risk lowered with lower amortizations and higher downpayments.

  63. Regardless of one’s stance on the CMHC, J.Moore is correct: just because it’s a government intervention doesn’t mean it is ‘socialistic’. That’s a simlification that people often miss. The government intervening in the *market* to attain a policy goal through *market mechanisms* and to *improve the profits* of a private corporation is not socialistic in the least. It’s the perfect example of state-supported capitalism.

  64. To your ‘just because it’s government intervention” statement. True, it doesn’t mean it’s for sure ‘socialistic’. Actually lets forget about that term entirely, as it’s basically meaningless here, and I only used it because of the original poster. We’re not talking about giving everyone a house.
    I think we’re actually on the same page as to whether the change to 30y is ‘socialisty’ as ‘BMO Mortgage Man’ state.
    If we disagree anywhere it’s simply how much ‘state-supported’ capitalism we believe should exist. Currently every taxpayer in Canada guarantees about $28k in high-risk mortgage. This amount has doubled since 2005. I think it is too high, and too risky (and therefor support the lowering to 30y). You may not.
    Either way having tax-payers guarantee longer amortizations does not move you closer to a true capitalism, and the move to 30y from 35y isn’t because “This is a really socialisty country”, as the original poster said.

  65. That is your opinion and nothing more. Your arguments are all based on how Kenny “feels” the world should be. They are not based on any measurable risk and they ignore offsetting benefits to the taxpayer.
    You are over-commenting on these boards and the moderator should limit your posts so we can read more informed commentary.

  66. Taking away choices that only existed in the last 10 years. Choices that allow Canadians to hand over 80% of their income to banksters as usury payments. Debt will set you free.

  67. Kenny,
    May I assume you are quoting the total insurance in force and dividing it by the population?
    If so, with all due respect, that is deceiving because 71% of that insurance is low-ratio (meaning backed by 20% equity or more). See TD’s 2010 Mortgage Market Primer. Low-ratio insured mortgages have exceptionally low default rates and it would be counterfactual to label them “risky.”

  68. Interesting, thanks Robert. Yes, that’s pretty much the calculation I did. It was a quick estimate, and should probably also be less because they hold $16B in investments, $6B in retained earnings, etc.
    So using the new numbers my back of the napkin calculation comes out to about $8k/taxpayer of ‘risky’ mortgages. Still high, but much more acceptable.
    Either way, the insurance in force number is up 16% in 2009, and 18% in 2008. I’d really like to know the rate at which the low-ratio number is dropping, but I don’t see it anywhere in the 2008 report.
    I still feel this rate of growth is not sustainable, and the reduction to 30y provides more good than bad. I understand that it’ll reduce options for well qualified borrowers, but I think attempting to keep the leverage on housing to 5 or under is a good thing.

  69. My pleasure. A large part of insurance growth is due solely to lenders portfolio insuring low-ratio mortgages for securitization purposes. Bulk insurance lets the lender securitize mortgages with less cost and pass along savings to home owners via lower rates.
    Cheers,
    Rob

  70. LS,
    “Highly qualified” essentially means the borrower has a very low probability of default. That probability can never be zero, but imposing regulations to reduce default risk for already low-risk borrowers is irrational and unnecessary by most objective standards. It is the higher-risk borrowers that need to be targeted.
    There are countless highly qualified Canadians who could easily qualify at 25 years, but choose 35 years temporarily–for various legitimate reasons, which have been outlined previously. You must remember that only the minority of people require 35-year amortizations to qualify for a mortgage.
    Regarding debt consolidation, besides buying “boats, vacations and big screen TVs,” people with unforeseen life circumstances must often rely on credit temporarily to survive. As just one small example, I put much of my university tuition on my credit cards because I had no other means to get my degree. Preventing low-risk borrowers from refinancing debt at reasonable rates is like handing the credit card companies a license to pillage citizens.
    Per your point about self-employed borrowers, it was not a claim of this article to give self-employed borrowers a mortgage if they cannot qualify for a 30-year amortization. That is mis-characterizing the point. The point was to allow people to use extended amortizations to build a bigger buffer, as they see fit. If they are well qualified to begin with, the government has no business dictating how they manage their cash flow after their mortgage funds. This same principle applies to those to allocate mortgage payment savings to investments, in order to build a better retirement.
    Moreover, there are very worthy borrowers with high income potential (doctors, accountants, lawyers, engineers, etc.) that use 35-year amortization temporarily to purchase earlier than they otherwise could. They have their reasons for buying now, and we don’t judge them. What I’m concerned with most is: Can they comfortably make their payments for their current term and beyond, given where rates could go?
    Part of the government’s role in insurance is to provide responsible borrowers a reasonable degree of flexibility, so as to further the housing market and the economy as a whole. I have never come across a Canadian that doesn’t agree that risky borrowers need to be curbed. Likewise, I have rarely come across a Canadian who disagrees that well-qualified, low-risk borrowers deserve the right to flexibility and the government’s support of that flexibility.
    Unfortunately, the government and some in the media have lumped all borrowers–be they prudent or irresponsible–into one giant heap.
    Rob

  71. Agreed, I too would rather have a higher disposable income…. BUT HST is a non-specific ‘club’ that smites nearly all expenditures, whether essential, good/beneficial, or frivolous! And since most people spend most of their income in that order, additional disposable income would be spent on the frivolous.
    An item specific consumption tax (as there is on gasoline, alcohol and tobacco) would more effectively moderate consumption in specific fields. I suppose this leads to a LUXURY tax… well, there is already one on a/c etc for cars.
    Do you trust government to ‘fine tune’ anything, effectively? And to take their hands off afterwards when conditions change? It is sad, but governments tend not to give up revenue streams.
    Growth, preferably sustainable and most likely fuelled by immigration, improves the economy and would be a better focus for government efforts. I agree that a rising tide floats all boats, except those with holed bottoms or stuck-in-the-mud (obsolete industries and those that refuse to change).

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