Recent Changes to Mortgage Financing in Canada

Jim Flaherty, Minister of Finance, and Christian Paradis, Minister of Natural Resources, announced on January 17th, 2011 prudent adjustments to the rules for government-backed insured mortgages to support the long-term stability of Canada’s housing market and support hard-working Canadian families saving through home ownership.

“Canada’s well-regulated housing sector has been an important strength that allowed us to avoid the mistakes of other countries and helped protect us from the worst of the recent global recession,” said Minister Flaherty. “The prudent measures announced today build on that advantage by encouraging hard-working Canadian families to save by investing in their homes and future.”

“The economy continues to be our Government’s top priority,” continued Minister Paradis. “Our Government will continue to take the necessary actions to ensure stability and economic certainty in Canada’s housing market.”

The new measures:

  • Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.
  • 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. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.
  • Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.

Our Government’s ongoing monitoring and sound underlying supervisory regime, along with the traditionally cautious approach taken by Canadian financial institutions to mortgage lending, have allowed Canada to maintain strong and secure housing and mortgage markets.

The adjustments to the mortgage insurance guarantee framework will come into force on March 18, 2011. The withdrawal of government insurance backing on lines of credit secured by homes will come into force on April 18, 2011.

 

*** The minimum downpayment required remains at 5% and did not increase as some expected***

 

 Source: Department of Finance Canada

 

                                             

 

On January 19th, 2011 the Canadian Association of Accredited Mortgage Professionals (CAAMP) released an update stressing that fears associated with these changes in financing for home ownership are exaggerated:

 

The article reads as follows:

A new study released by CAAMP concludes that very few Canadians face unaffordable increases in mortgage costs and Canadian lending criteria are already tight.
 
The report entitled, “Revisiting the Canadian Mortgage Market – The Risk is Minimal” states that “lenders and borrowers have been highly prudent in the mortgage market … and a vast majority of borrowers have left themselves considerable room to absorb increases in interest rates.”
 
The study said 79 per cent of mortgages are fixed rate and mostly for terms of five years or longer, leaving 21 per cent of borrowers with variable rates and more exposure to changes in interest rates. The study was based on about 59,000 mortgage loans (excluding renewals or refinances of existing mortgages) totaling just under $16 billion, which were funded during 2010, which represents about one-quarter of the total mortgage activity.
 
The study reported that the average gross debt service (GDS) ratio was 19.6 per cent, well below typical lender standards of 32 or 35 per cent used to qualify borrowers. The average total debt service (TDS) was 28.9 per cent, still well below the 45 per cent lender standard.
 
For fixed rate mortgages the GDS was 22. 5 per cent and the TDS was 32.5 per cent.
 
According to the report a 2.5 per cent rise in interest rates for variable mortgages would see the average GDS would increase to 24.6 per cent and the average TDS would increase to 33.7 per cent. CAAMP’s research indicates that of the mortgages funded in 2010, only 800 to 950 would exceed the 45 per cent TDS ratio.
 
For fixed rate mortgages, a one per cent increase in interest rates would increase the average GDS to 22.5 per cent and the average TDS to 32.5 per cent and less than one per cent (1,000 to 1,350) would have TDS ratios of more than 45 per cent.
 
The Association also found that among the high ratio loans approved in 2010 – with the reduced amortization period (30 years versus the prior 35 year limit), a small minority (about 2 per cent) would have TDS ratios above 45 per cent and those loans would probably not qualify. Some of those consumers would still be able to buy, by buying lower priced homes.
 
The report cited job loss or reduced income as the main reason for mortgage defaults, saying that “Unaffordable premium increases are a negligible risk factor at present and in the near-to-medium term future.”
 
A third cause is unaffordable increases in mortgage payments, something that caused difficulty in the U.S. as low introductory rates were replaced by market rates and payments that rose substantially. Stated the report “But this third category of risk is the source of recent concerns about future threats. This study concludes that very few Canadians face unaffordable increases in mortgage costs.”
 
 
To read the entire report click HERE
 

No Question is Wrong, What Matters is You Get The Right Answer!

 
Crystal Edwards, Sales Representative
 

 
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Crystal Edwards

Crystal Edwards

Sales Representative
CENTURY 21 United Realty Inc., Brokerage*
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