The Canadian Real Estate Association is concerned that changes to mortgage rules will force Canadians to buy homes through the traditionally slow winter market rather than waiting until the spring.
The federal government said that in 60 days, Canadians will no longer be able to obtain mortgages that have an amortization period of longer than 30 years. This will raise mortgage payments on a typical resale home by some $1,400 a year compared to the 35 year amortization rate available today.
With interest rates expected to move higher by the summer, CREA vice-president of government relations Randall McCauley said many would-be buyers could be tempted to jump into the market early to secure lower payments.
“Frankly, we’re concerned that the announcement came today when tomorrow there will be all sorts of speculation about interest rates even if they don’t change,” he said, referring to a Bank of Canada meeting Tuesday, when Governor Mark Carney is expected to hold his benchmark rate stead. “Even if rates don’t change, people will speculate about when they will change. That could bring people into the market early, since [the amortization change] is not coming into effect for 60 days.”
Finance Minister Jim Flaherty announced Monday that new federal rules will reduce the maximum amortization period to 30 years from 35 years for government-backed insured mortgages when a buyer has a down payment of less than 20 per cent. He also said he would lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes and said it would withdraw government insurance backing on lines of credit secured by homes.
The last time the government made changes – last year it made it more difficult for Canadians to qualify for mortgages by forcing them to qualify for a 5-year fixed rate rather than the lower variable rate – buyers went a buying binge that drove prices to an all-time high by May (the changes came into effect in April).
Sales then slumped across the country in July, and picked up slowly to end the year on a relatively steady note that had some economists suggesting the market had corrected itself without any need of government intervention.
“At the risk of dipping deep into cliché, the Canadian housing market appears to have achieved a perfect soft landing after its flying start in the recovery,” BMO Nesbitt Burns deputy chief economist Douglas Porter said on Friday. “
“The market is relatively well balanced and prices are still meandering ahead. We expect no fireworks in 2011, with rates poised to slowly grind higher later in the year, job growth decent but not spectacular, and buyers potentially constrained by concerns over record household debt levels.”
Calling the changes “prudent,” the Canadian Real Estate Association cautioned that the effect of changes to the amortization period aren’t easily gauged and will have to be monitored closely.
“We understand where the government is coming from and you’d have to have your head in the sand not to have noticed this has been a topic of conversation,” Mr. McCauley said. “We think by and large the changes are wise and prudent. But we are a little concerned – the amortization change is not a precise instrument – you can’t make a change an know it will have a certain effect.”
The average Canadian resale home sold for $344,551 in December. Assuming a five-year mortgage at 4 per cent interest, and the minimum 5 per cent down payment of $17,227, a 35-year mortgage would have monthly payments of $1,441. Shorten the amortization period to 30 years, and the monthly payment increases to $1,555.
The Canadian Association of Mortgage Professionals spoke to the government frequently over the last three months, and was pleased that the changes didn’t include any modification to the minimum down payment required to buy a home. And while president Jim Murphy said that he generally approves of the changes to amortization lengths, he hopes the government shows the same willingness to change if the market cools further.
“We understand why he did what he did,” Mr. Murphy said. “But we hope when the time comes, he’ll revisit that decision. Real estate is very important to the economy, and it’s crucial that we find a balance because you don’t want to overreact to temporary market conditions.”
He said a better choice would have been to keep 35 year amortizations, but force all applicants to qualify with the assumption of a 25 year amortization.
CAAMP, which represents the mortgage brokerage industry, released a study late last year that showed mortgage debt in Canada surpassed $1-trillion for the first time in 2010. About 22 per cent of all new mortgages had amortization rates longer than 25 years, up from 18 per cent the year before.
There was a jump in the number of Canadians using their mortgages to free up cash, with 18 per cent taking out equity as the cited a need for “debt consolidation or repayment.” The average amount borrowed against home equity was $46,000. Given that there are 5.65 million mortgage holders in Canada, CAAMP estimated the borrowing at $41-billion, about the same as last year.
“It is estimated that 30 per cent of the takeout was for debt reconsolidation and repayment,” the report states. “Therefore, while the amount of outstanding mortgage debt would have increased by this amount, totals for other types of debt would be correspondingly reduced. About $15-billion was taken out for renovations, $6-billion for education and other spending, $7.5-billion for investments and $4-billion for other purposes.”