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June 21, 2012
Federal Government Tightens Mortgage Rules...
On June 21, 2012, Ottawa tightened rules on mortgage lending in the country, reducing the maximum amortization period to 25 years, down from 30 years.
Here's a visual look at how these changes (which take effect July 9) would affect one homeowner's mortgage payments using a five per cent sample interest rate (which is above today's rate but well below the average interest rate over the last 25 years) and assuming the homebuyer were to take advantage of the maximum length of time for the mortgage without annual prepayments or accerated payments:
Sources: Canada Mortgage and Housing Corporation mortgage calculator, Canadian Real Estate Association, CBCNews.ca
The federal government has moved once again to tighten mortgage-lending rules amid lingering concerns about overheated housing markets in some major cities and rising household debt levels.
In a completely expected decision called for by some of the big banks — and one that's expected to soften housing prices across the country — the federal government is reducing the maximum amortization period for a government-insured mortgage to 25 years from 30 years.
This is the third time the federal government has reduced the maximum amortization period in the last four years, after it initially increased the lengths of mortgage terms to make it easier for Canadians to purchase homes. The government has since ratcheted it back from 40 years to 35 in 2008, and then further reduced it to 30 years in 2011.
Banks will still be allowed to offer 30-year amortization periods on low-ratio mortgages that include a down payment of 20 per cent or more.
The changes will see the government lower the maximum Canadians can borrow against their home to 80 per cent of its value, from 85 per cent, in an effort to encourage them to keep more equity in their homes.
As well, under the new rules, to qualify for a mortgage loan Canadians can spend a maximum of 39 per cent of their gross household income on home expenses such as mortgage, property taxes and heating, and a maximum 44 per cent of income on housing expenses and all other debt.
Ottawa will limit government-backed insured mortgages to home purchases of less than $1 million. A down payment of at least 20 per cent will now be required on mortgage loans for homes priced at or above $1 million.
Reducing the amortization period will increase monthly payments, but reduce the amount of total interest paid on a mortgage. Ottawa expects the change from a 30-year to 25-year amortization will, on a $350,000 mortgage loan at four per cent, increase the monthly payment $177 but reduce total interest costs by nearly $47,000.
It should be noted that the government has still allowed mortgages with as low as five percent down payments. It had been proposed at one point that consumers would have to come up with a minimum down payment of 10 percent. Apparently this idea has been temporarily shelved.
The government believes less than five per cent of home buyers will be affected by the clampdown but that it will slow down house appreciation significantly. In the overheated housing markets of Toronto and Vancouver, it is hoped that the prices will begin to fall and make homeownership more affordable for the masses.
These new rules take effect July 9, 2012. The short window of opportunity should prevent a short-term buying frenzy similar to what appeared after each of the previous two instances of the tightening of the rules.
As a result of these rule changes, Canadians should be able to see historically low interest rates until well into 2014. With this, the Calgary area should return to a Buyer's Market and put downward pressure of prices well into the future. When combined with the accelerating provincial economy which has just started to put upward pressure on prices, this should have a stabilizing effect on pricing.
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