It is clear from the changes that have been implemented over the past 4 years that the Government is clearly targeting a few areas of mortgage lending that it feels would best deal with the pesky housing market that just seems to continue chugging along.
For those of you who aren’t fully aware of these changes here is your recap:
- The maximum amount you can borrow when refinancing your home has been decreased from 85% of the value of your home to 80%.
- The maximum amortization that you can have on your home is now 25 years, down from 30 years.
- You will no longer be able to insure a mortgage if it is greater than $1 million.
- A reduction of the Gross Debt Service ratio from 44% to 39%.
Now that we are all up to speed on these mortgage rules that have been designed to slow us down, let’s take a look at what we deem to be the effects of these new rules.
- A reduction in the maximum amount that you can borrow against your home when you are looking to refinance will have some definite impacts on the market. It will increase debt costs for those looking to borrow more than the new government prescribed maximum. As borrowers look to unlock some of the equity in their homes they will be forced to turn to second mortgages, cash back mortgages, unsecured lines of credit and B Lenders who will no doubt offer a higher interest rate to these consumers. We know that when the last changes were made to refinancing loan amounts on January 7th, 2011, refinancing activity dropped by 22%. We can also assume that the vast home improvement industry in Canada will be affected. Last year home improvements accounted for a $66 Billion market, that market was fuelled with $17 Billion from mortgages. Finally, and what we believe to be an incredibly unfortunate result, consumers will have fewer options when looking to refinance their mortgages. With a reduction in how much you can borrow fewer lenders will be able to refinance your mortgage and the existing lenders will increase their client retention and probably force clients who have no other options into higher interest rate mortgages.
- 25 Year amortizations are the new maximum. The most positive impact from any of these changes is the forced saving that will result from reducing the maximum amortization from 30 years down to 25 years. Unfortunately it will also reduce the amount the families will be able to qualify for regardless of their ability to repay. A good way of looking at this is by using a family that earns $75,000 in annual income. This family will now be able to qualify for $49,000 less in mortgage amount on their purchase. We have little doubt that this will reduce the number of purchases taking place considering that last year alone over 40% of all new mortgages held amortizations of greater than 25 years. Finally the bad news here is that competition will be reduced, and consumers will be forced to stay with their existing lenders. You will not be able to switch your 30 year mortgage to another lender now if you intend to either borrow more money or the Loan to Value on your home increases because your home drops in value.
- No more insured mortgages over $1 million. This might be tough for people living in Vancouver and Toronto, where the majority of single family homes can easily travel north of $1 million.
- A reduction in the allowable debt service ratio. We don’t mind this one. Making mortgages more difficult to qualify for is one thing, our concern is only with the rules that reduce competition and hurt the consumer.
There is no doubt that these rule changes will have a dramatic effect on the market, especially considering all the bad news coming out of Europe, China and the United States. It can be argued that these are the strictest rules yet and they are being introduced in an economic climate that has more uncertainty than in the fall of 2008. The Governor of the Bank of Canada and the Minister of Finance have clearly decided that Mortgage Regulations will need to be used to cool down the housing market, rather than Monetary Policy, which we do not argue with, but could this latest round of changes be too much for our delicate economy to handle?