Starting today, borrowers face a new set of rules when it comes to mortgage lending in Canada.
The changes will have particular impact on younger/first-time buyers and could make it harder and/or more expensive to buy that first home.
As of today, buyers with less than a conventional 20-per-cent down payment will no longer be able to spread their mortgages over 30 years. The amortization period is being shrunk to 25 years. This is the measure that has been making headlines since June when the new rules were announced by Finance minister Jim Flaherty. Funny thing is, the 25-year mortgage was the norm until relatively recently. The 30-year mortgage was introduced to stimulate the housing sector. Now that the job is done, we are reverting to the old rules.
If you have 20 per cent to put down and thus don't need the Canada Mortgage and Housing Corp. to insure your mortgage, you can still get a 30-year term.
The second change to the mortgage game is that home owners will no longer be able to take quite as much equity out of their homes. Starting today, owners will be able to refinance up to 80 per cent of the value of their homes, down from 85 per cent.
Flaherty put the new measures in place to A) cool key overheated housing markets. B) to discourage Canadians from taking on too much debt C) to persuade homeowners to stop treating their houses like ATM machines and pay off those pesky mortgages.
Flaherty announced the new measures largely in response to overheating in the Toronto market. Not everyone thinks they were the best approach.
In an interview with The Globe and Mail, Philip Soper, the head of Royal LePage, said that Flaherty used a hammer, when a fly swatter might have done the job.
“The market is clearly cooling on a national basis, and I’m concerned
that what is essentially a Toronto problem is being attacked with a
blunt instrument that’s going to hurt the housing market nationwide,”
Maybe so. Mortgage industry insiders say the tightening will have the same effect as a one-per-cent interest rate hike. The government says the more stringent requirements will have an impact on about 5 per cent of new buyers, forcing them to the sidelines until either they save more or have higher paying jobs.
Some think the tighter lending rules will result in a market slowdown that would make it easier for young/first-time buyers to get into the market. Guess we'll see.
Several of my buyer clients have asked me what the mortgage rules will mean. I'm not convinced it will have much impact in Montreal. I don't see too many buyers opting for 30-year mortgages. I think I've had two clients over the course of the last two years. In Greater Toronto, some 40 per-cent of first-timers opt for 30-year mortgages. Different market, different circumstances. If clients ask my opinion, I encourage them to put down as much of a down payment as possible and to opt for as short an amortization period as possible. Call me crazy but I don't think it would be a terrible thing if marginal buyers were forced to the sidelines.
One last point. As of today, the CMHC will no longer insure mortgages priced above $1 million. It boggles my mind that the federal government was up until now insuring houses worth that much. Whatever happened to buying within your means. scraping and skimping to buy that first home? Seems to me that a $1-million home ought to be a move-up property. It would be in Montreal, but I suppose that in hotspots like Toronto and Vancouver, that kinda cash will get you a crack house or shack.
Check out Crack Shack or Mansion and you'll see what I mean.