New Mortgage Rules — Round 4

Jim-Flaherty-DOFSince the credit crisis, the Department of Finance has been ready to clamp down on mortgage lending. It has handed down:
And now, Finance Minister, Jim Flaherty, has announced the fourth round of mortgage restrictions in four years.
Starting 18 days from now (July 9, 2012), those with less than 20% equity will no longer be able to get a prime mortgage with:

  • a 30-year amortization
    • The max. will now be 25 years
  • a refinance to 85% LTV
    • The max will now be 80%
In addition, the government will:
These rules are a “judgment call” says Flaherty. They’re meant to “lower risk” for taxpayers and curb excessive household debt, which is Canada’s biggest economic risk. The above initiatives are in addition to pending OSFI mortgage restrictions, which will dampen home-buying demand even further. (OSFI’s final guidelines are expected later today.)
These are significant changes to Canada’s lending landscape. We’ll weigh in on the potential outcomes and implications throughout the day…

 Rob McLister, CMT
  1. What does this mean for uninsured mortgages? Last year, after the government lowered the maximum amortization to 30 years, the Big Six banks also curtailed maximum amortizations for uninsured mortgages. Despite making a down payment in excess of 20%, I was told that I could not opt for a 35-year amortization by several of the larger institutions. Will the same happen this time around?

  2. Guidelines have now been posted and does include at max 65% LTV for HELOCS. Additional lending will be allowed, but that portion will need to be amortized.
    Anyone have any insight on how this would affect someone undertaking the smith manoeuvre?

  3. Also, any word on the grandfathering of existing HELOCs? Or are those above the 65% threshold going to have to amortize anything above 65%?

  4. Have to say I did not see these changes coming since all of the talk and back and forth on OSFI’s pending changes. It is going to be very interesting to see the effect on our industry over the next year after both of these take effect.
    My biggest concern is the availability of unsecured debt by the banks, when will this be paid attention too?

  5. Can someone advise me on what it means for my mortgage? I have a 369k 30 years mortgage at a variable rate of prime 3% less a discount of .75. I still have 4 years on the mortgage, what does it mean when I will have to renew?

  6. I believe, there may not be an immediate change in amortization by big banks for conventional mortgages but it would happen gradually and the banks will curtail the amortization in due course. However, some non banking lenders may continue to offer 3o year amortization a bit longer to garner some business but ultimately most of the lenders would come back to 25 year amortization.

  7. Thanks for your reply, sorry but I am not an expert at this. If I understand it correcty I would still be able to have a variable rate at the time of renewal if I don’t add any additional amounts? Of course I say variable rate but in four years maybe a fixed rate will be a better option.

  8. “Banning Insurance on properties valued at over a million dollars.” This should effectively kill the domestic buyer from purchasing a house in Vancouver. Prices will come down and foreign buyers can get a better deal with their cash, while the locals wait forever to save $200,000.
    Of course there will be no problems for people to obtain unsecured credit. The banks can maintain their predatory credit card lending.
    These changes are too much to fix a problem that doesn’t exist.

  9. No body knows how many times the rules will change in the next 4 years when your mortgage comes up for renewal but MOST LIKELY your bank will offer you renewal for all the rates, including variable and you would be able to chose from that. If you do not like the rates you get from your bank at the renewal you could still switch your mortgage to other lender and who offers you the rates you like and it would still be done without problems as your mortgage is insured for the life of the original amortization.

  10. This should effectively kill the domestic buyer from purchasing a house in Vancouver.
    You think purchasing a higher than million dollar house if you can’t scrape together 20% down is a good idea?
    If the limit on CMHC insurance wasn’t removed, house prices in Vancouver wouldn’t cost that much to begin with.

  11. What a comedy of government intervention.
    So after all those changes, we are now back to approximately where we were before the 2000s. On the way CMHC has minted many housing millionaires by loosening credit and fueling house price appreciation.
    Now they will mint some misery on the way down..
    If they hadn’t messed with the amortizations to start with we would never have had a problem. House prices would have risen slowly and we’d be in a much less risky position.
    This will be interesting.

  12. I’d love to know what percentage of homes insured by CMHC actually had claims paid out by CMHC? They say they are doing this to protect tax payers. Claims vs. Ins Premiums would be an interesting statistic to see. Maybe cut back the overhead of CMHC and the taxpayers would be better served.

  13. I vaguely recall seeing discussion on this site talking about what percentage of buyers would not have been able to buy last year without a 30 year mortgage. However I couldn’t find anything like that last night.
    If it was on this site, can someone please point me towards that article?

  14. Pretty sure it wasn’t a large percentage (definitely <10%, but I think it was <5%).
    This is again going to hammer investors who want the longer amortizations for rental properties.
    Anyone who thinks the big banks won't follow these guidelines can't remember the last moves from 40 all the way to 30. The big banks will almost positively make almost instantaneous adjustments to 25 yr amortizations.
    Wasn't TD's CEO pushing the gov't to do this a few months ago? And Flaherty basically came back and said "Do your job"? And now, this???

  15. I’m surprised the Conservatives just didn’t say that CMHC wasn’t going to provide any insurance and guarantees to the banks. That would immediately tighten the market. No bailout for banks for their risky investments.
    OTTAWA (Reuters) – The Canadian government tightened rules for mortgages and household borrowing on Thursday to make it harder for home buyers and homeowners to take on massive debt, the fourth attempt in four years to cool the still hot housing market.
    Pointing to “excessive demand” in cities like Toronto, particularly for condos, Finance Minister Jim Flaherty wants tighter mortgage rules to do the work that interest rates cannot, given the inability or unwillingness of policymakers to raise borrowing costs in the face of global economic problems.
    “Our government is committed to the long-term stability of the housing market,” Flaherty told a news conference in Ottawa. “I have been listening to the market, and quite frankly I don’t like what I hear.”
    Canada’s bank regulator, the Office of the Superintendent of Financial Institutions, released its own guidelines to lenders, urging them to perform due diligence on the borrower’s ability to repay a debt and manage risks effectively.
    The mortgage rule changes will cut the maximum length for government-backed insured mortgages to 25 years from 30 years and lower the maximum amount Canadians can borrow against their homes to 80 percent from 85 percent, among other measures.
    The amortization period for mortgages had ballooned to 40 years amid deregulation in the last decade, but the government trimmed it to 35 years in 2008, 30 years in 2011 and now 25 years to discourage home buyers from taking on too much debt.
    The change means borrowers will have to make higher monthly payments and build equity in their homes more quickly. But it will also cut the ability of consumers to buy higher-priced homes, a move experts believe will help cool the bidding wars that have dominated some markets.
    The changes take effect on July 9, a relatively quick implementation period that may bring forward some housing activity but not create the volatile bulge that followed more gradual changes in 2011.
    “Households have little chance to pull activity forward to get in front of the changes. We nevertheless do expect weaker sales in the months ahead,” David Tulk, chief Canada macro strategist at TD Securities wrote in a research note.
    Flaherty said the government will also set a maximum gross debt-service ratio of 39 percent for households and only allow government-backed insured mortgages on homes with a purchase price of less than C$1 million ($980,000).
    The cap on payments on mortgage debt and other home-related expenses at 39 percent is designed to prevent new buyers from taking on a mortgage where they might be unable to keep up with payments when interest rates rise or their circumstances change.
    The ratio of household debt to personal disposable income has risen in Canada to a record 152 percent, a level similar to that seen in the United States before the housing boom there burst, leaving many homeowners with less equity in their homes than the homes were worth, or in foreclosure.
    The Bank of Canada has identified elevated household indebtedness as the most important risk to financial stability in Canada. But it cannot use its traditional tool to cool borrowing — raising interest rates — because global financial crises are threatening Canada’s economic growth

  16. This is an interesting tactic by government ocool the economy down. They cannot raise interest rates as it will eventially cause the some peoples bubble to burst considering the debt they hold. They instead try to cool things down by making it harder to borrow. I think it is a smart overall move

  17. If they just eliminate non-residents from owning residential properties, Canadian citizens wouldn’t be in this position. Our ‘housing market’ would be more ‘reflective’ of actual citizens owning ‘homes’ without the super-inflated prices. Then we wouldn’t really need all of this. Sure..foreign investors contribute to our country but homelessness & unaffordability based on income followed

  18. Does anyone know if people who have 30-year am mortgages pre-approved but with no closed deals going to have to close by July 9th or have it revoked?

  19. According to FAQs on Department of Finance Canada’s website
    A mortgage pre-approval without an agreement of purchase and sale is not sufficient to qualify for a 30-year amortization. You may have a 30-year amortization only if your agreement of purchase and sale is dated before July 9, 2012 and you have made a mortgage insurance application before July 9, 2012. You may wish to discuss with your lender to revise your mortgage pre-approval using the new parameters announced today.

  20. Thanks Joe. I think I was remembering incorrectly and it was the down payment issue.
    40% are taking longer than 25 year terms, but I wonder what percentage of those could not qualify at 25 years. We are looking at buying and would have gone with a 30 year just for extra leeway in case of job loss, but paid it off at a 25 year or faster rate.

  21. What about the 5-year fixed mortgage rates? The 5-yr bonds are dropping and probably will go even lower as more international investors will park their money in the “safe” Canadian bonds – will the government allow (maybe even force) the banks to drop their spreads ?

  22. Too much too late. The market is already slowing down everywhere but Toronto, which IMO is just late to the party.
    The government had many other options than just changing amortization. If they were concerned about indebtedness long term, make credit cards harder to get. To keep people from borrowing too large a mortgage due to these “emergency” rates, make them qualify on the posted rate for all mortgages, or make them qualify at a 25yr amortization but leave the choice of amortizations to the client.
    Flaherty and co are using a sledgehammer on a market on its knees already.

  23. the guidance refers to high ratio insured mortgages; each lender will evaluate whether they want to adopt these guidelines for their conventional buyers too. No decision has been set out just yet.

  24. one thing is VERY clear.
    this government is protecting the banks and NOT the average middle class Canadians!

  25. You know, I was thinking about other strategies that the gov could have implemented, but I really like what VanBroker mentioned about the qualifying bits. And of course, those pesky credit cards and unsecured debt.
    Unrelated to mortgages, but I really find it odd that the gov keeps throwing money at these car companies and yet insists that we keep them afloat by buying more vehicles (on credit for most of us), yet in the same breath tell us that we are taking on too much debt (yes the same can be said about many commodities).
    Not hating, just perplexed…

  26. -If the gov make it harder to purchase a home, doesn’t it mean more renters, meaning investors will be more incline to acquire more rental properties now that there going to be a bigger demand, these are the same investors who are already purchasing multiple condominium unit from the builder, reason for so many condo being built,
    – In order to cool down the market, we will need to see more inventory of property for sale, won’t happen because renting will be a good option,(my opinion)
    -if the feds are doing all these changes does it mean that rates won’t go up anytime soon,

  27. The average middle class Canadian will now buy a more reasonable home and pay less interest over the life of the mortgage… that’s a bad thing?

  28. Simple solution to all these problems… give people mortgages for houses they can afford to buy. Genius where’s my Nobel prize for economics?

  29. Nobel laureates don’t make statements they can’t back up.
    How many people are getting mortgages they can’t “afford to buy?” Where is your proof?
    Don’t waste our time with a general statement that’s all cynical rhetoric. Give us hard numbers.

  30. Someone should sue the conservatives and CMHC. They effed with the housing market making it go up and now effed with it on the downside. Anyone who bought during their 30/35/40/35/30 year pyramid is now at risk of losing money because of their changes. They’re certainly not saving me any money by changing the amortizations, if anything it’s costing me more money. They should have dropped it a year at a time or something less drastic.

  31. I am sorry to say no Nobel prize yet…
    The word “AFFORD” is an extremely loaded word that is difficult to measure!!
    Each institution measures affordability with slight differences and this is necessary with so many employment variations and situations.
    As well each geographical area come with vastly different lifestyle costs… how many cars if any does a household need or have? Cost to heat a home per year? How many kids in the house? and so on…
    Another thing to consider is that current affordability indicators use “Ratios” and this in it self has a large flaw… consider this:
    Household with $10,000 gross monthly income vs one with $5,000 gross monthly income. at a 44% TDS = $4,400 and $2,200 fully used to pay debts in each home.
    Now if we estimated the tax rates are 35% and 25% the net incomes would be: $6500 & $3750
    1)$6500 net income – $4400 payments = $2,100 left over for expenses and savings.
    2)$3750 net income – $2200 = $1,550
    left over for expenses and savings…
    Thats $550/m more left for expenses/saving in scenerio 1.

  32. Good point. I suppose the assumption is that higher earners will have more expensive lifestyles.
    Sure I made only $15,000/year during undergrad, but the days of paying $245 a month in rent and only eating ramen are over too!

  33. i think flaherty is a genius, that way the bubble won’t burst. it just makes it harder for any idiot to bid over a house

  34. Rob,
    I think the take away here is Government changes rules all the time. In this case they are closing the barn door after the horses have gone.
    They could even come back to the “old rules” and suggest one needs 25% down instead of 20%.
    Like the OAS, a favorite trick is to have a change happen some time in the future to put people asleep and not to worry about it.

  35. So if you buy a house which costs you more than $1M (which most decent homes in Toronto do), you must have a minimum 20% down (over $200K) as mortgages on these homes can no longer be insured. So a home purchased at $1,050,000 would only allow you a maximum mortgage amount of $840K. So if you purchased a house under or at $1M, you only need 5% down, (eg. $47,500 down on a house purchased for $950,000 – essentially allowing an insured mortgage amount of $902,500). Where is the common sense in that? They will allow larger mortgages on homes which cost less! And has anyone thought about what this will do to the value on homes over $1M? If you have to come up with 20% to purchase a decent home then we’re in for big trouble in the housing market. I think this is going to cause a huge drop in values!

  36. If I’m not mistaken, they insure up to a $1 million. Beyond that the risk is yours or the bank’s to carry. In reality, in your example, bank Mary ask you to put $100 000 down. 5% and everything over $1 million.
    Somebody can correct me if I’m wrong.
    In any event, buying a million dollar home with less than 20% user a scarey idea!

  37. There are probably a lot of people in the same boat, but also a significant fraction who really do need the 30-year am.

  38. By most quantitative measures, the number of rental condos being acquired by investors (at least in Toronto) is greater than actual rental demand requires. At least in Toronto, condo rents have been relatively stagnant for several years.

  39. So if you buy a house which costs you more than $1M (which most decent homes in Toronto do)
    You must have very high standards.

  40. A detached home which has been renovated (not requiring any renovations) with a decent sized lot and in a good neighbourhood will cost you $1M. Heck, a renovated semi-detatched on a main street in a great neighbourhood will cost you $1M. Teardown bungalows in Willowdale and Leaside are $1M. This is not “high standards”. This is reality.

  41. There are plenty of very “decent” homes in great neighbourhoods in Toronto that cost far less than $1M. But I agree with you that recently renovated, detached homes on large lots in prime neighbourhoods do cost that much and more. I guess it depends on what your requirements are.
    I also agree with the earlier commenter that there is something scary about taking a high-ratio mortgage for a $1M+ home (i.e. why is the down-payment money not there?)

  42. I work for a lender and I see it a lot of the time where the downpayment is not there on homes over $1M. Often borrowers like to keep their money freed up for other types of investments. Many like to buy investment properties as well and utilize the equity in their principal residence for the downpayment on those rentals.

  43. Keith,
    You are mistaken. This is from the Finance Dept. FAQ
    The new measure announced today will establish that government-backed mortgage insurance is only available for a new high loan-to-value mortgage if the

      home purchase price is less than $1 million.

    Because homes priced at or above $1 million would not be eligible for government-backed high ratio insurance, borrowers for these homes would require a down payment of at least 20 per cent.

  44. I have 5yr closed variable for 30yr amortization. My question is when i renew the mortgage can i still have 30yr amortization?

  45. Yeah because buying something to live in is totally speculative, “I think I’m going to need a place to live”

  46. The simple answer is No But you may find a lender in 5 years that is still offering 30 year terms and “refinance” back to 30 years.
    Normally if you take a 30yr AM after 5yrs you would have 25 years left and could renew with your existing lender or transfer to another lender but keep the same amortization of 25 years remaining. If you put less than 20% down, this again may be more restrictive at renewal not to make any changes other than Rate and Lender.

  47. Everyone needs somewhere to live, yes.
    Do the *need* to buy it? No.
    If you bought an asset, that is by nature speculation. Anything that happens to the value of that asset is your responsibility.

  48. “Often borrowers like to keep their money freed up for other types of investments”
    That’s nice Sabrina, but why should your client’s choice to do that be insured and covered by the taxpayer?

  49. If you’re planning on living there long term, what does it matter to you what your house is valued at? You’re not selling it, so that doesn’t matter. Unless of course you were borrowing against it to pay for your lifestyle.

  50. Often borrowers like to keep their money freed up for other types of investments. Many like to buy investment properties as well and utilize the equity in their principal residence for the downpayment on those rentals.
    Sabrina, I’m sure you never meant it like this, but you’re the poster child for stricter mortgage rules. You think it’s the government’s responsibility to maintain looser lending standards so your clients can continue to borrow against their “equity” to buy yet another property?

  51. Rates were higher back then too. Did you forget that part?
    It’s the sliding rates that followed that inflated home prices. The government should have lowered maximum amortizations with declining interest rates. They didn’t. That’s what ramped up housing.

  52. “If they were concerned about indebtedness long term, make credit cards harder to get.”
    That would be interfering. There is no CMHC equivalent for the CC market.

  53. Most first time homebuyers aren’t buying million dollar properties. You start with a townhouse in the ‘burbs like every other city in this country and work your way up.

  54. Can a longer term amortization be transferred to a new owner? If so what rules down the new owner qualify under and what is likely to happen at renewal?

  55. Hey Ken,
    Default Insuarnce is assumable and can be taken over by a purchaser… the amortiztion and dollar amount cannot change, as for the quaification this is to be verified with the underlying lender holding the mortgage being assumed. It would most likely be under the new qualifications as the new owner needs to be ablt to afford higher rates in the future etc.
    Example 33yrs AM left on a 3.65% fixed rate also with 2years left
    – The lender may use 33years for the qualifying amortization but would most likely use the 5yr MQR rate of 5.24% for a rate as there are not 5 years left in the term

  56. These rule changes have hit smaller communities much harder than cities like Vancouver and Toronto. I personally think that we should go to regional rules. This would potentially slow sales in hot markets and make purchasing in smaller communities more attractive.
    An example would be to reduce GDS/TDS for cities like Vancouver and keep smaller cities and towns as is. Amortizations in Vancouver could go to 20 years and smaller cities could stay at 25 or even go back to 30.

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