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Government of Canada Moves to Protect, Strengthen Canadian Housing Market

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dpylyp

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"The Government of Canada today announced adjustments to the rules for government guaranteed mortgages aimed at protecting and strengthening the Canadian housing market. The new measures include:

Fixing the maximum amortization period for new government-backed mortgages to 35 years;
Requiring a minimum down payment of five per cent for new government-backed mortgages;
Establishing a consistent minimum credit score requirement; and Introducing new loan documentation standards.

Today’s announcement marks a responsible and measured approach by the Government to ensure Canada’s housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada.

The new limits are planned to take effect October 15, 2008. This would allow existing mortgage pre-approvals with the common 90-day duration to be used or expire. Certain exceptions would also be permitted after October 15. The Government will work closely with all stakeholders to ensure timely and effective implementation of these measures.
As these measures relate only to new, government-backed insured mortgages, Canadians who already hold mortgages will not be affected by this announcement.
The measures announced today will build on the strength of Canada’s housing market. According to the International Monetary Fund, the increase in house prices in Canada is based on sound economic factors such as low interest rates, rising incomes and a growing population. A recent Statistics Canada report concluded that home ownership is at record levels, with over two-thirds of Canadians owning their own home.
Mortgage arrears—overdue mortgage payments—have also remained low. In recent years, the percentage of mortgages in arrears for three months or more continues to be at low levels not seen since 1990. "

I had heard earlier this year that some were talking about 50 year amortizations to keep the sales cycle alive. I am much more pleased with this announcement that was made without fanfare.
 
It is indeed a bit strange that it was made without fanfare.

We have "nowhere near" the problems that the Americans have in their mortgage market. But it's good to reinforce the message that basic sensible standards have to be met. I have had some doubts about the 40-year amortization since it was introduced and I think it's a good move to set a maximum of 35 years. If this change makes a difference to anyone such that it would kill their deal, it's probably best that they not be borrowing anyway.
 
this is a good move imo, as it tightens the rope on risky borrowers. Lenders will not budge from these guidelines if they can't securitize their loans. The kicker is that this could further accentuate the fact that the market will cool off in the later part of the year.
 
Bank of Montreal and CIBC have announced that they will no longer do mortgages with 40 year amortizations, with or without mortgage insurance. I think it's significant that ING Direct has made the same announcement. They do quite a bit of lending in the secondary market, through mortgage brokers.

The rest of the government announcement, which did not get reported much: some other procedures are also being tightened up. Gross debt service ratios will be limited to a maximum of 45%, hopefully avoiding the situations so prevalent in the U.S. where people were paying half or more of their gross income (before tax) on housing. "Interest only" payments will not be permitted on insured mortgages, that is, a real amortization will have to take effect from the beginning.

Better documentation of property values will also be required. As an appraiser myself (with a bias, I admit), I am particularly pleased about this. I have seen cases of CMHC approving mortgages at well over 100% of any realistic value on a given property, apparently based on sloppy underwriting and little or no consideration of what a property is really worth.
 
I think you will see a flurry of activity as buyers who wanted the 40-year amortization make sure they have bought by Oct 15th....after that, I think the market will really slow down - my banker pal tells me that most of the mortgages he is doing these days are on a 40 year amortization.

....also, one of the most important parts of this latest change, is that CMHC (and presumably the other insurers) will require a Beacon score of 620 to underwrite /any/ high ratio mortgages...does this mean that, even if a person has, say, 15 percent downpayment, if their credit score is less than 620, they will be unable to get any financing?

First, the Toronto Land Transfer Tax, and now, CMHC tightening up lending conditions, both are going to make it tougher for all buyers...

my 2Cents..
 
One thing we shouldn't do is underestimate the significance of this legislation and the prevalence of 40 year amortization and other loose lending arrangements. This is not about skimming the marginal cream off the market. According to Garth Turner's greater fool blog 62 percent of new home buyers take 40 year amortization products. This means that the majority of buyers in some asset types will no longer be able to purchase at present price levels while maintaining their desired standard of living.
 
yyzer said:
I think you will see a flurry of activity as buyers who wanted the 40-year amortization make sure they have bought by Oct 15th....after that, I think the market will really slow down - my banker pal tells me that most of the mortgages he is doing these days are on a 40 year amortization.

....also, one of the most important parts of this latest change, is that CMHC (and presumably the other insurers) will require a Beacon score of 620 to underwrite /any/ high ratio mortgages...does this mean that, even if a person has, say, 15 percent downpayment, if their credit score is less than 620, they will be unable to get any financing?

First, the Toronto Land Transfer Tax, and now, CMHC tightening up lending conditions, both are going to make it tougher for all buyers...

my 2Cents..
Click to expand...

all good news, increasing the transactional costs and tightening credit, in the end will help create a sustainable market. hopefully these measures have come in time.
 
TrickyRicky said:
One thing we shouldn't do is underestimate the significance of this legislation and the prevalence of 40 year amortization and other loose lending arrangements. This is not about skimming the marginal cream off the market. According to Garth Turner's greater fool blog 62 percent of new home buyers take 40 year amortization products. This means that the majority of buyers in some asset types will no longer be able to purchase at present price levels while maintaining their desired standard of living.
Click to expand...
The thing is... I don't understand why people would NOT take a 40 year amortization.

I'm well on track to pay back my mortgage in about 15-20 years. Although I took a 40 year mortgage just so I could decide my own payment schedule. The number is completely arbitrary... sadly, most of the "old fogey" types just don't understand that ("silly youngsters will be paying off their mortgages for the rest of their lives! they don't know what they're doing... blah blah").

I challenge you guys to find a single person who actually intends to take the full 40 years to pay off their mortgage. I mean, no one is that stupid. My prepayment priviledges are 20% of the original value of the condo per year. Meaning I could pay it off in 5 years.

Now knowing all this, can someone please give me a single good reason to NOT take a 40 year amortization? I just don't get it..
 
gei said:
The thing is... I don't understand why people would NOT take a 40 year amortization.

I'm well on track to pay back my mortgage in about 15-20 years. Although I took a 40 year mortgage just so I could decide my own payment schedule. The number is completely arbitrary... sadly, most of the "old fogey" types just don't understand that ("silly youngsters will be paying off their mortgages for the rest of their lives! they don't know what they're doing... blah blah").

I challenge you guys to find a single person who actually intends to take the full 40 years to pay off their mortgage. I mean, no one is that stupid. My prepayment priviledges are 20% of the original value of the condo per year. Meaning I could pay it off in 5 years.

Now knowing all this, can someone please give me a single good reason to NOT take a 40 year amortization? I just don't get it..
Click to expand...

Needlessly paying for mortgage insurance if you can afford a 25 year mortgage?
 
avatarreb said:
Needlessly paying for mortgage insurance if you can afford a 25 year mortgage?
Click to expand...
once again... another demonstration of the lack of understanding.

you do not need mortgage insurance if you put more than 20% down, regardless of the amortization period.

even if you did put less than 20% down, the difference in mortgage insurance between and 25 year and 40 year amortization is nearly nothing... the biggest factor in how much mortgage insurance you pay for is how much you put down.
 
gei,

You may have a point with regards to your own financial position but that is not what is at issue. The issue is the impact of 40-year mortgage products on the market and the general consuming public. The fact that you claim to have a financial plan of some sorts, any plan whatever it may be, puts you in the top percentile of personal financial competency. It is the relationship between loose lending practices and high prices that is so damaging to the market. In such a market everything is priced to perfection to the detriment of all buyers and sellers and the nation in general.
 
TrickyRicky said:
gei,

You may have a point with regards to your own financial position but that is not what is at issue. The issue is the impact of 40-year mortgage products on the market and the general consuming public. The fact that you claim to have a financial plan of some sorts, any plan whatever it may be, puts you in the top percentile of personal financial competency. It is the relationship between loose lending practices and high prices that is so damaging to the market. In such a market everything is priced to perfection to the detriment of all buyers and sellers and the nation in general.
Click to expand...
that's eventually the answer that everyone seems to give me: "fine in your case it makes sense, but no one else would do it that way"

which is why i asked, does anyone know one single person who took a 40 year mortgage who actually intends to take that much time to pay it off?

I'm guessing the answer is no.
 
gei said:
once again... another demonstration of the lack of understanding.

you do not need mortgage insurance if you put more than 20% down, regardless of the amortization period.
Click to expand...

You're right. I think I missread your original post.
 
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