Back in April, Finance Minister Mark Carney remarked that “in exceptional circumstances, if there are issues that threaten financial stability, such as household debt… the bank could use monetary policy for that purpose.”
Just three months later, those exceptional circumstances have become reality.
On Wednesday, the Federal Government made their move to further tighten mortgage rules, addressing concerns over high Canadian household debt.
The Finance Department announced yesterday that it would reduce the maximum amortization period for a government-insured mortgage, lowering it from 30 to 25 years. The government has also limited the amount of equity that can be borrowed against a home at 80 percent of the property value, down from 85 percent.
While the change in amortization was expected, the shift in equity caught many of the nation’s biggest banks off guard.
Key Points to Consider
Wednesday’s moves are designed to cool the housing market and help reduce the nation’s dependency on debt. Figures from Statistics Canada show that the average ratio of debt-to-disposable income now sits at 152 percent, up from 150.6 percent at the end of 2011. Under the new rules, buyers who purchase a home with a down payment of less than 20 percent of its value are required to purchase government-backed mortgage insurance through the CMHC (Canada Mortgage and Housing Corporation). Mortgages that are amortized over a period longer than 25 years will no longer qualify for that insurance, effectively making it impossible to get a long-term, highly leveraged mortgage in Canada.
Shorter amortization periods demand higher payments, however they also enable homeowners to quickly build equity into their homes.
Additional terms in Wednesday’s report included capping the gross debt service (which looks at a consumer’s total debt payments as a percentage of their income) at 39 percent. Ottawa also announced that they would no longer allow high-ratio mortgages over $1 million.
Yesterday’s announcement marks the fourth time in four years that the government has clamped down on mortgage rules. The first changes came in 2008 when Ottawa reduced the maximum amortization period to 35 years from 40 and increased the down payment requirement to five percent.
Surprisingly, the Bank has yet to make alterations to the minimum down payment required on mortgages. This still stands at five percent.
What About Interest Rates?
The Bank of Canada is expected to keep the overnight rate low in order to let the dust settle following Wednesday’s changes. Ottawa hopes that the combination of low rates and stricter rules will not only help improve the economy, but will also ensure Canadians don’t get in over their heads.
Will this Slow the Market?
It’s tough to tell what impact Wednesday’s changes will have on the nation’s hot real estate market. CIBC economist Benjamin Tal described the changes as a “gentle push,” in the Globe and Mail, however there remains concerns that the changes could cause too abrupt of a shift. “All of these things might precipirate the housing market downturn that the government wants to avoid,” remarks Jim Murphy, CEO of the Canadian Association of Mortgage Professionals.
For more information on how Wednesday’s changes could impact your best rate mortgage search, contact a mortgage broker. You can still take advantage of low rates with FamilyLending.ca’s online mortgage pre-approval process too!