Comparing New Amortization & Down Payment Rules

Regulations-for-Mortgages-TighteningGovernment mortgage restrictions instituted from 2008-2011 have not achieved their goal, suggests Desjardins’ Senior Economist Benoit Durocher.

He wrote this on Thursday:

…The third series of [government mortgage rules] was announced nearly a year ago now, and we must conclude that the tightening introduced to date has not
slowed the market enough.

Under these conditions, it is likely, and perhaps even desirable, that the federal government will shortly announce a fourth series of measures to further limit mortgage credit.

It almost sounds like Durocher has some inside info.

He adds:

Among other things, the government could be tempted to once again raise the minimum down payment on new loans (it went from 0% to 5% in October 2008).

Many believe a down payment increase would have a more chilling effect on home prices than the other option being talked about: a reduction in the maximum amortization from 30 to 25 years.

The difference in impact would depend, however, on the degree of rule changes.

Down-PaymentFor example, raising the minimum down payment from 5.0% to 7.5% (a possibility that’s been discussed) would require that entry-level homebuyers come up with $8,700 more on a typical Canadian home purchase. For most, that’s not totally out of reach.

A five percentage point increase to the minimum down payment is a somewhat different story. Requiring 10% down equates to $34,780 on an average home. That’s beyond the means of a sizable minority of first-time buyers.

First-time buyers are essential to home price stability. They account for 1/2 of unit demand according to Altus Group research. While the latest data suggests that average down payments are somewhere around 30% (an estimated $104,000), first-time buyers put down far less.

That means stricter down payment rules could potentially hurt home values at the margin, if other things are held equal.

In terms of amortization, a government-imposed reduction—from 30 to 25 years—would lower a typical family’s maximum purchase price by roughly 9%. (That’s based on today’s 5-year fixed rates, normal qualification guidelines, median incomes, and average consumer debt.)

To put this in perspective, a reduction in amortization from 30 to 25 years would cut a typical buyer’s maximum possible purchase price by ~$31,000 (again, based on an average income, average debt, a 5% down payment, etc.).

Fortunately, most people don’t need a 30-year amortization to buy a home. Despite 41% of homebuyers choosing extended amortizations, the majority could have qualified with a standard 25-year mortgage. (That said, this doesn’t mean that cutting amortizations across the board is justified. Well-qualified borrowers deserve a carve-out in the rules because they utilize extended amortizations for legitimate cash-flow management purposes. But that’s a topic for another day.)

**********

It is a given that new down payment or amortization restrictions will negatively impact affordability. The government realizes this.

However, new rules will not necessarily halt the freight train that is housing. The last three years have made that clear. It would likely take another recession or higher rates in the face of minimal employment/income gains to derail the train altogether.


Sidebar: It bears reminding that if the government did impose new mortgage rules, they would likely only apply to high-ratio insured mortgages.


Rob McLister, CMT

  1. The truth is they Have been tightening, and while it may look like prices have gone up, this only relates to properties very close to municipal centers, for example: in Vancouver where I work, if you look 30-45 mins outside the center you would see prices lower by more than 5% or so. Can anyone tell me how they evaluate if prices rise or fall? It’s not all “cookie cutter” out there.
    The real nail on the coffin will be rising interest rates. Even though it’s widely anticipated that rates will not rise for 36 months, one would be wise to explore longterm fixed rate options such as 10yr fixed below 4%.

  2. how about a different idea…take away “cash back”, “borrowed down payment” and “gifted down payment” mortgages, make home buyers save more, which means spend less. it also means less hosehold debt and some “skin in the game” which would lead to less mortgage default. come on Mr. Finance Minister…stop making your decisions from your perch in the back pocket of the big 5 banks!

  3. Well-qualified borrowers deserve a carve-out in the rules because they utlize extended amortizations for legitimate cash-flow management purposes.
    These rules only apply to high-ratio mortgages written by Schedule 1 banks. Well qualified borrowers are of course free to put down more cash or seek out alternative lenders (who still offer 35 year ams even now). Why should the CMHC backstop them?

  4. The problem is not our mortgage debt. Flaherty needs to address the real challenge for Canadians and that is a reliance on credit cards for their day to day expenses. The big banks make big money from the credit card debt so a doubt that the government of the day would wish to challenge them but they must. Canadians can live without credit … they can’t live without affordable mortgage programs

  5. Couldn’t agree more. Why is IMBA and CAAMP not doing something useful for a change and defending the mortgage market? Government needs to impose responsible regulations on the use and repayment of credit card debt. I see no reason why a minimum principal payment could not be required on credit cards, and then enforced by freezing the card until the payment is made. This in my opinion would ecourage repayment and reduce the most expensive overal debt. If the government is really serious about reducing consumer debt they should start with the consumer’s most expensive and perpetual debt. I suspect this

  6. I’m in agreement with Chris on this one. Maybe the government should be talking to the credit card companies a bit more.
    A lot of my clients come in and can’t qualify because they have to much credit card debt.

  7. A lot of my clients come in and can’t qualify because they have to much credit card debt.
    The solution is better education, not government mandates to pay down x% or some such. We’ve already seen with the mortgage restrictions that it doesn’t work. Banks will find a way around those restrictions.
    The ultimate solution is when the people coming in to your office are educated enough that they don’t think buying a house while having credit card debt is a good idea. That’s the real problem here.

  8. Yes. Well qualified borrowers may benefit from easy credit, but that doesn’t mean they deserve it to be handed to them by the government.
    I’ve said it before, and I’ll say it again. If they’re so well qualified, then the free market will serve their needs. No need for the government to backstop that.

  9. You forgot about “skip a payment” schemes where you can skip one payment every year without penalty.
    The reason the restrictions haven’t worked for the most part is that the banks have found ways around them for the marginal borrowers.
    So please, 10% down and 25 year amortizations. The bank tricks will still be there, but very few will be willing to give someone 10% for a down payment.

  10. Please allow me to clarify some points from an economic view.
    The government is trying to address self-employed home buyers who they see as the most vulnerable class taking on mortgages they can’t afford. Recent stats show self-employed workers carry more mortgage costs then paid-employees. http://i39.tinypic.com/35lusux.png Of those self-employed, are mainly woman who have been growing at double the rate over men http://www40.statcan.gc.ca/l01/cst01/labor64-eng.htm
    As many are aware, the government and banks have eased income reporting (by absurdly allowing no income reporting) for self-employed workers over the past decade—this is one of many factors that has driven the housing market.
    Despite tougher rules on down-payments and record low interest rates, the real threat to housing is–jobs. While many believe rising home prices are due to low interest rates, this is far from the truth of what’s taken place since the 2008 downturn. To clarify, one major factor that saved the Canadian housing market from collapsing, was a $1 trillion dollar global stimulus package coordinated amongst G20 leaders. This major action prevented companies from laying off workers, created more ‘shovel ready’ jobs and unclogged the bond/lending markets which helped restore confidence in a financial lock-up.
    The stimulus money has now run its course as the global economy has lost its recovery momentum. Already we see corporations going bankrupt, downsizing and laying off workers to boost profits for 2012 and forward. Unfortunately this time, world leaders will not coordinate in another round of stimulus as the initial stimulus has proven to be a failure. Thus, nations of the world now face a self-battle to deal with their own contracting economies.
    This time it’s not about affordability, it’s a job issue.

  11. Canada’s delinquency rate 90+ days:
    Mortgages- 0.45%
    Credit Cards- 3.9%
    (Source: CBA Jul-11)
    Credit card debt is overwhelmingly the leading cause of consumer financial trouble. Any government actions that does not incorporate all forms of debt, is entirely misguided.

  12. Why not work within the current framework vs. imposing more regulations? There is already too much confusion in the market without adding more to it by changing more rules so shortly again.
    Similar things could be accomplished by increasing beacon requirements, reducing tds/gds maximums, and a minimum “own funds” to be applied on first-time purchases. This will make them more accountable in qualifying and for saving.
    If governments want to get involved, they can enforce a standardized IRD policy in the Bank Act instead.

  13. @banker in an ivory tower
    Credit Card delinquency rates are not a good indicator because many people pass their credit card debt on to their lines of credit to pay a lower interest rate. A better indicator is the business and consumer insolvency rate provided by the Office of the Superintendent of Bankruptcy Canada. However, while the media has been reporting that bankruptcies stats are down, the real reason is due to a court ruling that allowed a person or business under bankruptcy to file a proposal to their creditors first. So all may seem ok when in reality consumers & businesses are drowning in debt. Stats here http://i43.tinypic.com/2iigbqa.png
    @Mark
    The damage on mortgage debt has already been done and there isn’t much more the government can do to help increase personal incomes in the private sector. This is the main talk taking place at Davos at this moment. I’m afraid to inform many that what they thought was the financial ‘norm’ is far from true, rather reckless spending at everyones expense causing a euphoric wealth effect that pulled the wool over many peoples eyes.

  14. You need to better support your own viewpoints before disputing others. You contradict yourself when you say a better indicator is insolvency rate but then go on to point out that Bankruptcy court processes have changed over time, skewing such a measure.
    My point about credit card delinquencies is simple: When 9 times more people are in default on credit cards vs. mortgages and the government is considering further restraint measures on mortgages without the same consideration to other forms of debt, such action will treat the symptom but not the disease!

  15. “(by absurdly allowing no income reporting) for self-employed workers”
    I am not aware of any such offering in Canada?

  16. For those interested year over year consumer credit is growing at 3%. Mortgage credit is growing at 7.4% according to latest Bank of Canada numbers for Dec 2011. Mortgage credit is still growing too high especially at a time when disposable incomes are flat. I would not be surprised to see more mortgage curbs.
    At the end of 2011.
    Total household debt was at $1.595 trillion
    Consumer debt was at $488 billion
    Mortgage debt was at $1.107 trillion
    Here is a graph of year over year Canadian consumer and mortgage credit growth since 1990.
    http://2.bp.blogspot.com/-YtVzf5LbUnw/Tvy6p7woinI/AAAAAAAABos/HVQOHD01WoM/s1600/Canadian+Consumer+And+Mortgage+Debt+Growth+Year+Over+Year+Jan+1990-Oct+2011.jpg

  17. The government wouldn’t compare delinquency rates this way simply because a mortgage payment is a higher priority then a credit card payment, therefore consolidating total debt and calculating outright delinquencies is more realistic.
    Banks and governments have sophisticated real-time algorithms that indicate how customers are spending and where the money is coming from. There is no rules in Canada that stops a customer from using his/her line of credit to pay off a credit card or even a make mortgage payment by adding funds to an account. Most distressed debtors will always try to differ payments by borrowing more—this is the death spiral.

  18. Well, here’s one from a big Canadian bank (the one “most likely to run into a sharp object”)
    This program is for you if you want:
    An easier time qualifying for mortgage financing if you’re self-employed as you don’t have to prove your income1 so long as you have 35% equity (or 10% equity for a high-ratio mortgage2)
    A streamlined mortgage approval process which doesn’t require any detailed financial statements or income verification1, meaning less paperwork and hassle
    Your approval to be based on your personal credit history, not your business history

  19. So what? in 2011, average house prices in Canada went up by 8.8%. The stuff bought with consumer credit, 2.5%!

  20. “in 2011, average house prices in Canada went up by 8.8%.”
    Which means the mortgage curbs over the last few years are not working as well as the Feds have wanted. Meaning, more curbs are most likely on deck.
    For some people, credit cards are THE problem, but overall it is mortgage debt that take up 70% of all household debt in Canada.
    While sky high interest rates on credit cards are a problem, it is small compared to the potentially enormous problem that mortgage debt will do to Canadian households down the road

  21. Hi Ralph and LS,
    Longer amortizations do not create undue risk for the government when the borrower is well qualified. That is a fact that can be supported with data from all of the insurers.
    As a more general point, Canada could make every borrower put 20% down and mandate 20-year amortizations, but at some point we need to recognize that not every borrower is the same.
    Allowing strong responsible homeowners the option of payment/down payment flexibility provides a net economic benefit for society. It enables people to redeploy cash flow to better uses and adds no material cost to the system.
    Policy makers’ focus is better placed on borrowing that creates unproductive and meaningful risk.

  22. I’m a simple guy, made my share of mistakes in managing my personal “fortune”. The one thing I see is that lenders (Mortgage or credit card companies) are more than willing to do the math for you and tell you what you can afford. How we define what people can afford (debt service ratio??) and who decides that? Everybody has different money management skills (some having very little…ahem..) but with a good credit rating and income, some people can easily be courted into a lifelong love affair with money lenders in one form or another. My point – education might be what’s needed most of all.

  23. Longer amortizations do not create undue risk for the government when the borrower is well qualified. That is a fact that can be supported with data from all of the insurers.
    I don’t disagree, but this is a poorly supported fact. We’ve only had 30 and 35 year amortizations since 2006. 40 for a very brief interval. That is, at best, a quarter of a housing cycle and not strong evidence for anything.
    In any case, I’m not worried about the risk from well qualified buyers. I just don’t see why it’s the government’s job to support those who need it least.
    Allowing strong responsible homeowners the option of payment/down payment flexibility provides a net economic benefit for society.
    I would like to see any study that has been done on this. I have not seen any.
    What we’re talking about by “flexibility” is loosening credit. Is looser credit better for the housing market? Yes, in the short term of course it is. House values are driven up, consumers can spend beyond their means and fold the debt into their appreciating houses. That boosts the economy.
    But all that is just bringing the demand forward and increasing risk for everyone. Once prices are maxed out at the looser credit levels, the party is over, and everyone is much more exposed to interest rate risk. Meanwhile new buyers that have not ridden the train up have a tough time paying down the exponentially larger mortgages.
    It adds no material cost to the system.
    I just don’t buy it. If it truly ads no cost and no risk, then why does the government have to backstop it? Why doesn’t every bank out there offer 0% down, 40 year mortgages for a small additional fee to those well qualified borrowers? It’s a sure thing according to you, so why aren’t they jumping at the chance to make the extra cash?
    It just doesn’t pass the smell test.
    Policy makers’ focus is better placed on borrowing that creates unproductive and meaningful risk.
    I agree. So how do you do that?

  24. :) It’s so funny.
    Everyone discusses how to limit lending …
    Why lenders lend so freely then ?
    Probably because they are secure in this gamble game.
    Change the bankruptcy mercy with 2 years work for free for every 100 K owned and I bet few will file for “bankruptcy” and lend more than they can pay back.
    Laws are weak, they facilitate crazy lending.
    The whole system is broken because relies on crazy lending at the first place.
    No one should spend more than what they earn. Credits are the evil of the financial system and they made few people billionaires.
    Now governments are stuck as they want to cut lending and to prevent ballooning credit, but they know that will kill the whole economy.
    Sadly the poor people will suffer again … as always in history.
    Inflation is the only way if nothing else changes. And in 10-15 years – depression again. No other way until the new World Order kicks in ;)

  25. LS,
    Amortizations over 25 years have existed in other jurisdictions for years. Insurers have plenty of international data on the link between amortizations and default rates.
    Please note, looser credit is not what we advocate when speaking of preserving options for responsible borrowers. Approval standards can still be held high and default rates can still be rock-bottom, despite permitting prudent borrowers more flexibility.
    As for why the government should support more financing choices for well-qualified borrowers, you could just as easily ask why it should support choice for any borrowers. The answer is clear from a public policy standpoint, has been debated extensively elsewhere and is beside the point of this article. If you’re interested, there is lots of commentary on this debate available via the search function.
    Regarding “costs to the system,” there are numerous considerations but the risk people are most concerned with are defaults. Well-qualified borrowers categorically do not add a material amount of default risk to the system. Note that I do not say “no risk” as you have written. But the risk strong borrowers add is almost inconsequential and completely offset by the insurance premiums they pay.
    Per your last point, there are various lenders offering 35-40 year amortizations and interest-only terms at no extra cost to the borrower. Those features are not available on high-ratio insured mortgages by government decree. They used to be, but as you know, the government pulled back on extended amz to curb borrowing, among other things.

  26. Excessive credit card “lending” only affects those who over-spend on those cards (and the credit card companies, if they default). If you go to Best Buy and max out your VISA to buy a big-screen TV, it doesn’t affect the price of big-screen TVs in general. The availability of credit cards may stoke demand for big-screen TVs and other consumer goods, but because supply responds quickly and is “limitless” from the consumer’s perspective, prices don’t change much.
    Excessive mortgage lending, on the other hand, affects everyone who is involved or wants to be involved with the housing market. If you get a 5%-down, cash-back, 30-year am, skip-a-payment mortgage at 5x income in order to buy a starter home in mid-town Toronto, it absolutely does affect the price of starter homes in general. Everyone has to take a mortgage for their first home, and supply is limited and responds slowly to demand. The end result is that prices are dictated by those willing or able to borrow the most.
    This IMO is why the government is right to tackle the mortgage situation, which catches even responsible buyers in a web of ever-increasing home prices. Credit card debt primarily affects the borrower only. My $0.02.

  27. :) no value for you … Probably your business depends on lending :). It’s so pathetic … Your request. … This isn’t China or Iran or Venecuela to block people. Emigrate there.

  28. Insurers have plenty of international data on the link between amortizations and default rates.
    Ok, I don’t think they’re directly comparable, but I’m not worried about well qualified borrowers either so I think I can drop that part of my argument.
    Please note, looser credit is not what we advocate when speaking of preserving options for responsible borrowers.
    You are. The lending criteria is only half of the story. Say you let people with a credit score of 850 or higher access zero down 40 year mortgages again. Yes, the criteria is very strict, but you are still loosening credit for those who qualify.
    you could just as easily ask why it should support choice for any borrowers.
    Right. It shouldn’t. But that’s another topic as you say.
    What is the mandate of the CMHC? It is to make housing more affordable to Canadians. It is not to allow well qualified borrowers more flexibility. Those borrowers do not need any help affording housing.
    If you’re interested, there is lots of commentary on this debate available via the search function.
    Sure there are a million opinions. What I am not seeing is scientific evidence… but I’ll keep looking.
    Per your last point, there are various lenders offering 35-40 year amortizations and interest-only terms at no extra cost to the borrower.
    Excellent. The free market is serving the needs of those borrowers.
    Those features are not available on high-ratio insured mortgages by government decree.
    I see it differently. The only reason we have high-ratio mortgages is because of government interference. It is pretty universally accepted that higher LTV means higher risk. There is also significant evidence that allowing lower LTV increases house prices, so the increased affordability is short-lived at best.
    Returning to stricter regulations is just a partial return to a system that was working perfectly fine for 60 years.

  29. LS,
    Looser credit is not a requirement for extended amortizations. Someone can choose a 35-year amortization but be made to qualify at a lower amortization. Hence, the risk at origination is basically the same in the case of a strong borrower.
    Again, there is no economic justification to take away payment flexibility from highly-qualified homeowners. It’s the people that are material default risks that should be the focus.
    As for your assertions that CMHC is “interfering,” that housing policy was better in prior decades, and that flexibility for well-qualified borrowers is unwarranted, I wish I had more time to debate these with you more. For now, we’ll agree to strongly disagree. :)
    All the best…

  30. Perhaps the government should also require minimum 10% down on vehicle financing?? If you can’t afford to have skin in the game take a bus?

  31. This is CIBC. Ralph, you missed including what the #1 next to “income” is for? “Conditions and restrictions apply”
    That’s the way big corporations say don’t take us too literally because attached to this cute advertising bit is 6-8 pages of conditions and restrictions.
    In Canada, you still need and have always needed a verifiable income! No NINJA loans here.

  32. “What is the mandate of the CMHC? It is to make housing more affordable to Canadians”
    Not quite true. Your confusing CHMC’s affordable housing division with CMHC’s mortgage insurance division. At CMHC, both of these divisions operate quite separately.

  33. I’m not fond of the analogy. The supply of used and new cars is essentially limitless, so demand doesn’t affect pricing in any significant way. The value of a used car is also very predictable and not subject to boom-bust cycles. Finally, people generally don’t borrow 3-5x their annual income to buy a car, nor do they take 20-30 years to pay the loan back.

  34. “The end result is that prices are dictated by those willing or able to borrow the most.”
    Couldn’t disagree more. Housing prices are driven by demand for housing, which is driven by **jobs**, quality of life, in-migration, etc. Access to credit has impact, but perhaps not as much as you think.
    If 200 net new jobs are created in a community, easy credit or not, housing is required. Fiddling with qualification rules simply adjusts the balance between landlords and renters. Last time I checked, a disproportionate amount of mortgage default and fraud was in the non owner-occupied (rental) housing.
    The real issue is easy access to consumer credit, and that is what creates borrower risk – over extension. What would happen if we lowered TDS to say 38 or 40%? What if you had to have a down payment to buy a car on credit?

  35. I don’t think we actually disagree all that much. Demand is important, but the real fuel for the fire comes from the ability to borrow. Available data seems to show that house prices in Canada are more strongly correlated with overall mortgage debt than with any other indicator (population, immigration, employment, incomes, etc.)

  36. Simple Lower TDS guidelines. This will curb how much people can borrow and limit how much consumer debt they can have before they chose to buy a home at the very top of their income levels. Increasing down payment minimums force people to rent for longer. If you have good credit and low TDS you should be able to borrow at 5% or even 0%.
    Example buying a home with 780 credit score and TDS of 25%. Is this really a risk of default even at 0% Down Payment.
    tighter guidelines should only apply to people who choose to have high debt ratios and bad credit. More risk

  37. Hi J.S.,
    Thanks for post. It’s very true that capacity to pay (measured in part by total debt service) and willingness to repay (as indicated by credit history) are often better predictors of losses than 5-10% differences in a borrower’s equity.

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