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PETER DOLEZAL: The impact of Canada’s new mortgage amortization rules
In late June the federal government introduced significant changes to Canada’s mortgage lending rules, aimed primarily at the high-ratio (80 per cent plus) mortgage purchaser – in most cases a first-time buyer. With both the government’s and Bank of Canada’s long-expressed concern over the growing debt burden of Canadians, some change was expected. The dramatic scope and potential impact of the new rules that came into effect July 9, however, took many by surprise.
The most significant change announced was the reduction of maximum amortization periods from 30 years for high-ratio mortgages, to 25 years. For an average mortgage of $300,000, this change is approximately the equivalent of raising interest rates by about one – not insignificant for the first-time buyer. The irony is that a few short years ago, the same minister of finance gradually raised the allowable amortization period from 25 years to 40, only to quickly lower it to 35, then 30 and now back to 25 years. We have come full circle, back to where amortization periods stood for many decades since the 1950s. While this latest change is mandatory only for borrowers with less than a 20 per cent down payment, lending institutions often apply such changes to all mortgages, whether insured or uninsured. The effect therefore could become much broader than solely on the first-time buyer.
Another change of lesser consequence is a new limit of 80 per cent on the refinancing of a mortgage, from its previous level of 85 per cent – as a result, slightly restricting the amount of equity a homeowner can extract from his home.
Yet another modification, of much less impact is that high-ratio mortgage insurance will no longer be available for homes valued above $1 million. Those planning to purchase a home exceeding $1 million will now require a down payment of at least 20 per cent.
While the primary reason given by the government for these changes is the need to tame Toronto’s overheated condo market, the overall effect will reverberate across Canada, including Greater Victoria.
In our area, about 27 per cent of all home sales are comprised of condominium and townhouse units – the primary market entry point for first-time buyers. Their entry into the real estate market is the engine which drives other higher-priced sales and subsequent purchases. We are as a result likely to experience a slow-down of sales volume, and lower prices in entry-level homes, followed closely by the same effect on homes of higher value. Compared to 2011, our median prices have already been on a softening trend. These changes will clearly accelerate downward pressure on both sales volumes and prices.
In B.C., the only relief from the initial impact may come from our provincial government’s one-year program of providing a $10,000 cash rebate to all but the highest-income first-time buyers of newly constructed homes. This program is set to end April 2013. After that date, the full impact of these new mortgage policies will be felt.
There is little doubt that markets will react across Canada. The broad impact may be unfortunate however, since in many areas of the country including ours, the market had already, without this extra nudge, begun to adjust itself toward more modest pricing. With real estate such an important economic driver, we can only that the intended nudge does not become a significant drag on Canada’s economic recovery.
Stay tuned and hold on to your hat.
A retired corporate executive, enjoying post-retirement as a financial consultant, Peter Dolezal is the author of three books. His most recent, the Smart Canadian Wealth-Builder, is now available at Tanner’s Books, and in other bookstores.