The keys to home ownership in Canada are now harder to reach than ever. Meanwhile, the keys to the Canadian Mortgage Market have just been handed to the Big 6 Canadian Banks.
Yesterday Bill Morneau, Canada’s new Minister of Finance, introduced a slew of mortgage rule changes aimed at slowing down the Canadian housing market and reducing Canadian debt levels. We believe that these new rules will provide some of the desired effect. Our concern is the very serious impact on competition in the Canadian Mortgage Market.
In the words of the Canadian Government these new rules were designed to “ensure people aren’t taking on too much debt”, “prevent people from using loopholes on the principal residence tax exemption”, and “manage risks to benefit all Canadians long term.”
Perhaps the only points left unsaid, but most evident in the new rules was: To reduce competition in the Canadian Mortgage Market, artificially increase interest rates, and further enrich the Canadian banks.
In this newsletter I will outline the major rule changes and their likely effect on the Canadian Mortgage and Housing Markets. Finally, I will offer some suggestions as to how we can best prepare for the rule changes both before and after the October 17th, 2016 and November 30th, 2016 implementation dates.
To find out why these mortgage changes might force either you or someone you know to refinance a mortgage before November 30th, 2016, keep reading.
There are four major changes that were announced by the Minister of Finance.
1. Effective November 30th, 2016:
Anyone with a mortgage of greater than $1 million dollars will not qualify for mortgage insurance. No portfolio insurance will be offered to Canadian Homeowners looking to refinance a mortgage in excess of $1 million regardless of the value of the home.
No portfolio insurance will be available to Canadians looking to purchase a home for over $1 million regardless of down payment.
This one is really important! If you have a mortgage in excess of $1 million dollars and are thinking about refinancing, get started now! Without mortgage insurance all larger mortgages will have to be done at a Bank. This will mean less competition for the banks and therefore higher interest rates for larger mortgages.
Up until now Insurance was offered to all Lenders in Canada on mortgages where Canadians were putting down more than 20% and could qualify using the prescribed qualifying criteria. This opened lower cost funding sources to lenders other than the Canadian Banks and created a very healthy and competitive mortgage market. By eliminating this insurance source all Lenders will now depend on the Canadian Banks. This will artificially increase mortgage rates in Canada while further enriching the Banks. Please do not forget that it was the Canadian Banks who gobbled up all of the allocation of this low ratio portfolio insurance when confidence was lost in 2008. Now that this tool no longer benefits them and is being used to increase competition and reduce mortgage rates for Canadians, as it was intended, why is it being removed? Here is a link to a Maclean’s article outlining how the Banks used over $125 billion of the roughly $250 Billion in portfolio insurance in existence during the liquidity crisis of 2008 to 2011.
Our Response: This is devastating news for competition in the Canadian Mortgage Market. This is a clear signal to the Canadian Consumer that the Canadian Government is going to be helping Canada’s Banks more than ever. Consumers can expect fewer options and higher rates when they look to refinance their next mortgage if it happens to be over $1 million.
2. Effective October 17th, 2016 almost all Canadian mortgages, will need to be qualified at the Bank of Canada’s posted 5 year fixed rate, which as of today’s date sits at 4.64%. Right now only consumers selecting Variable Rate Mortgages are required to qualify using this inflated rate. This is designed to protect consumers against possible rate increases that may come at some point in the future. With this new rule even consumers who are looking to take a 5 year fixed rate at 2.2% or a 10 year fixed rate at 3.8% will need to qualify using the inflated Bank of Canada rate. Only clients who select one of our non insured Bank lenders will be able to qualify using a lower rate when applying for a 5 year fixed rate mortgage with greater than 20% down.
Our Response: This will reduce the number of buyers in the Canadian Housing Market, particularly first time buyers. Many young buyers looked to the 5 year fixed rate mortgage products to allow them to qualify for reasonable loan amounts that would allow them to get their foot in the housing door. These buyers will now be disappointed in how much they can afford and will either choose to continue renting, or buy cheaper homes (if they can find them). To give you an idea of how severe this restriction is, a first time buyer making a salary of $50,000.00 per year, with $0 in debt (no student loans, no credit cards, no car payment), and a 5% down payment, can only qualify for a property worth about $230k.
Moreover, Canada is in a decreasing rate environment, so amongst those who can qualify at the benchmark rate, or have 20% down, look for the popularity of Variable Rate Mortgages to increase as there is no longer a benefit to selecting a fixed rate.
3. A tax loophole being used by foreign buyers will be closed. From this point on in order to qualify for the capital gains exemption a foreign buyer must be a Canadian resident when they purchase their home and a Canadian at the time of its sale.
Our Response: GOOD, but who cares? This is simply closing a loophole. This is good news for the Canadian Government who will generate some additional revenue, but will have no effect on the Canadian Housing Market.
4. Both High Ratio and Low Ratio Insured mortgages will have the same rules. Regardless of how much equity you have in your home, or how much you are looking to put as a down payment you will only be eligible for a 25 year amortization. Going forward any Canadian looking to get a low ratio insured mortgage will not be able to exceed a 25 year amortization and need to meet minimum income and credit requirements.
Our Response: We are not sure how much risk is removed from the market by eliminating 30 year amortizations. Underwriting guidelines are already pretty strict, so the only result of this change will be the death of the 30 year amortization.
A slight reduction in the rate at which homes are selling and increasing in value. Primarily targeting first time home buyers.
Canadians should expect the housing market to keep chugging along. Consumers will not immediately jetison the idea of home ownership because of some tightened lending criteria. First time home buyers will be hardest hit as they will struggle to find a home in a price range they can qualify for. Mortgages will become more expensive with decreased competition, fewer options, and more regulations.
A greater percentage of our disposable income will be earmarked for interest as the banks tighten their grip on the mortgage market. More Canadians will look for alternative lenders to fill the void left by the new mortgage insurance rules – this means more second mortgages at higher rates.
Canada’s Economy will continue its slide. Look for the Bank of Canada to drop rates again in the next twelve months as Canada feels the impact of the new mortgage rules and the Canadian consumer retreats.
The key takeaway here should be that anyone considering a refinance of a mortgage that is greater than $1 million needs to act fast. Soon we Mortgage Brokers will only be able to offer options from the 6 Canadian Banks.