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New Mortgage Rules Could Price Some Out of Market!


Tougher mortgage lending rules, as unveiled by Finance Minister Jim Flaherty on Monday, could add an estimated $100 a month in carrying costs for future homeowners — pricing some people out of the real estate market — and affect roughly 20,000 home sales in 2011, analysts say.

Those rough estimates emerged after the government announced changes that would see Ottawa no longer guarantee insured mortgages with terms exceeding 30 years (the previous maximum was 35 years).

Also, Mr. Flaherty lowered the maximum amount Canadians can borrow against the value of their homes, to 85% from 90%, on a refinancing; and removed federal government backing for home equity lines of credit, or so-called HELOCs, whose popularity soared in the past decade with growth double that of mortgage debt.

Combined, the measures “will reinforce what we were expecting to be a slower pace of real estate activity,” said Adrienne Warren, senior economist at Bank of Nova Scotia.

She said the impact to the change to amortization would be relatively modest, at about $100 more per month in carrying costs for an average home. Nevertheless, “it could price some people out of the market at the margin, but it suggests [Canadians] will have to take on smaller debt than they otherwise would.”

Meanwhile, Pascal Gauthier, senior economist at Toronto-Dominion Bank, said the amortization change could affect 20,000 home sales on an annualized basis, with the average home price likely to weaken by 2% this year or slightly more than TD had forecast.

The changes, as reported by the National Post on Sunday, emerged as worries escalate among Bay Street leaders and the Bank of Canada about the record levels of household indebtedness, and how conditions could deteriorate unless pre-emptive action was taken.

“We want to make sure we don’t have the kind of medium-term problem that has been experienced elsewhere because of this tendency by some to assume large indebtedness at low interest rates,” Mr. Flaherty said. “People need to demonstrate that good Canadian trade of prudence and reasonableness in terms of their debt assumptions.”

He said the growing appetite for HELOCs was of particular concern and was an “important” factor in the rise in overall household debt. Mr. Flaherty said some banks were insuring, through Canada Mortgage and Housing Corp., their exposure to HELOC liabilities, and wants to put an end to that practice.

“That’s particularly risky,” Mr. Flaherty said. “Some of those loans are not used to create housing in Canada. They are used to buy boats and cars and big-screen TVs. That’s not the business mortgage insurance was designed for.”

Executives at Bank of Montreal were quick to applaud the government's move.

“The actions announced are prudent, measured, responsible and timely,” said Frank Techar, president of personal and commercial banking at Bank of Montreal.

The changes will be implemented in stages, with adjustments on amortization and refinancing limits coming into force on March 18. Government backing on HELOCs will be removed as of April 18.

The government said exceptions would be allowed after the new measures come into force when needed to satisfy a home purchase or sale and financing agreement struck before the March and April in-force dates.

The minimum down payment, at 5%, will remain as is. Mr. Flaherty said the government could have gone further by boosting the minimum down payment but opted not to in an effort to strike a balance. “We do not want to create any shock in the market or any sort of dramatic pressure. We want to be moderate.”

The changes to the country’s mortgage rules -- the second in as many years -- emerge amid rising concern about the record levels of household debt, which measured as a ratio of money owed to disposable income nears a startling 150% as of the third quarter of last year.

The Bank of Canada recently warned debt levels are growing faster than income, and the risk posed by consumer indebtedness to the domestic economy would continue to escalate without a “significant change” in how consumers borrow and banks lend.

Bank of Canada governor Mark Carney said policymakers have a “responsibility” to look at the benefits of pre-emptive action. Joining the chorus have been chief executives at the big banks, most notably Ed Clark at Toronto-Dominion Bank, in publicly advocating for tougher mortgage standards.

Last Friday, Prime Minister Stephen Harper acknowledged his government was considering changes to the rules governing mortgages.

In February of 2010, Mr. Flaherty moved to toughen up the mortgage rules amid worries that Canada was in the midst of a housing market bubble. The reforms, since introduced, compelled borrowers to meet standards for a five-year fixed-rate mortgage, even if the buyer wanted a shorter-term, variable rate loan; reduced the amount Canadian can borrow against their home, to 90% of the property value from 95%; and require purchasers of rental properties to issue a 20% down payment as opposed to 5%. The moves played a role, observers say, in slowing down real estate activity.

Analysts at Scotia Capital suggested government regulation was the way to go in terms of curbing household appetite for credit as opposed to the Bank of Canada raising interest rates, which they said would be “imprudent” at this time.

The central bank issues its latest rate statement on Tuesday and it is expected to hold its benchmark rate at its present 1% level as signs indicate the economy may be benefiting from renewed business and consumer confidence in the United States.

Stewart Hall, economist at HSBC Securities Canada, said the extraordinarily low-rate environment “provides all the incentive to consumers to borrow and spend and none of the incentive to save. You can try to [regulate] that away but that is apt to be fraught with significant frustration.”

Paul Vieira, Financial Post · Monday, Jan. 17, 2011



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