Over the past several years, Canadians have seen sweeping reforms in mortgage policies. While some may consider them more restrictive, others would argue that Canada’s past reforms and continued reform is helping stabilize and control the Canadian economy. Regardless of your perspective, the Canadian home-buying and property investment landscape has changed considerably in the last five years. As 2014 comes upon us and many Canadians expect more policy changes and restrictions, it is important to know what they may be and how that impacts your home purchases or investment property portfolio, as well as to know current CMHC and Department of Finance policies regarding lending.
Mortgage Regulations in 2013
After the financial crisis of 2008, and the great recession that followed, many governments began re-evaluating policies regarding the lending habits of banking institutions. For those who are unfamiliar with Canadian mortgage lending practices, the Canadian Mortgage and Housing Corporation, CMHC, is responsible for providing mortgage default insurance to lenders. In the event that you are unable to pay off your home, this is for your lender’s protection. While the CMHC provides insurance to lenders, ultimately it is the Department of Finance that makes important changes to the rules and policies regarding lending. Over the last five years, the Department of Finance has gradually required shorter amortization periods (the lifespan of a mortgage), a better credit score and in some cases, for buyers to make larger down payments than ever before.
Before our latest depression and preceding financial crises, amortization (the lifespan of a mortgage) could be as long as 40 years. By 2013, this span had been reduced to 25 years for homes with less than 20% equity. And, mortgage holders saw an increase in carrying costs for their mortgage. Homebuyers had a shorter amount of time to repay their mortgage, ultimately buyers will pay less interest due to it. While monthly payments went up in 2013, a much larger portion of the amount paid went to the principle amount, not interest.
Prior to sweeping changes that began in 2008, some buyers may have been able to get a home with favorable mortgage rates, low monthly payments and 0% down. By 2013 however, the government has enacted new policies, requiring at least 5% down for all new purchases. For homes priced at over 1 million dollars, 20% of the value is required as a down payment. Though, these homes and investments have the benefit of no longer adhering to the same rules and requirements of homes with a smaller price and less equity.
The CHMC is a form of insurance for banks, but it does have limitations. While the CHMC raised its annual cap for lenders to $85 billion in 2013, a mandate was also put in place later in 2013 stating that lenders could only use $350 million of that per month. This was to discourage what Finance Minister Jim Flaherty considered reckless lending by banks, who would offer very low mortgage rates in an effort to draw in more homebuyers.
While the affect mandate had on consumers isn’t direct, the cost is passed down to potential home buyers through a slight bump of 0.2 to 0.65 in mortgage rates. This may seem significant considering the overall price of a mortgage but historically speaking, it is a small advancement and mortgage rates, generally, are still considered low even as we enter 2014.
What to Expect in 2014
As 2014 approaches, many analysts have looked to Ottawa and Finance Minister Jim Flaherty for hints at what changes the Department of Finance will have in store for lenders, homeowners and future borrowers alike. While policy changes are difficult to understand, it is important to understand upcoming restrictions, especially if you’ll be interested in purchasing a home or refinancing an existing mortgage.
Another aspect of lending is mortgage-backed securities, or MBS. While mainly a concern for investors rather than home buyers, the government is considering creating a bid system for the MBS market. A bidding system would allow lenders to pay for the guarantee of a government backed security and in turn, they could issue more mortgages. This translates into a bonus for investors as it means there are opportunities for purchasing. This bidding system, while it seems to be advantageous at first, could easily make it so that only the bigger banks can get these securities, effectively squeezing smaller banks and lenders out of the competitive market. When fewer lenders can offer mortgages and mortgage rates, there is less competition and drive to make these appealing to potential investors.
The government is also considering term limits on certain insurance. CMHC is responsible for providing mortgage insurance and 2014 could bring yet another change in these policies. If the CMHC puts a term limit on bulk insurance, which is insurance for mortgages with 20% or more equity, this could translate into higher rates for the borrower. As term limits are reached, lenders must renew this insurance at a repurchasing cost. This cost would be passed on to the borrower, mainly as higher mortgage rates.
In an effort to continue to stabilize the housing economy, the OSFI (Office of the Superintendent of Financial Institutions) is looking into the feasibility of lowering the amortizations of low-ratio mortgages. Low ratio mortgages are those with 20% equity or more, and the current amortization rate for these mortgage types is up to 35 years. The OSFI is conducting research into how it may benefit, or harm, the housing market if this number is lowered to 25 years.
These changes may occur in an effort to ‘cool down’ the housing market. Finance Minister Jim Flaherty has made it clear that the Department of Finance is interested in making home buying more difficult, both to help the housing market and curve the debt of Canadian families, investors and home buyers. Finance Minister Flaherty has been quoted as saying that his goal is to slow down the market to prevent a crash later. Whether it will prevent a crash later is yet to be seen, but the effect is felt now as home sales are showing a decline, especially in urban areas.
The last several years have seen a lot of changes for lenders and borrowers alike. Before the recession of the late 2000’s and the depression that followed, getting a mortgage in Canada was considerably easier. After witnessing the real estate crash in the United States though, and experiencing the global depression, the Canadian government has enacted new policies that will hopefully safeguard the Canadian economy. These changes make it more difficult to purchase a home however, they also attempt to make certain that when a new home is purchased, the borrower will be able to pay it off. Regardless of upcoming changes for 2014, the message that the Department of Finances has been sending is clear: buying a home is not easy right now, nor will it be in the near future.
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