Excessive debt set off alarms in Ottawa
Canadians were borrowing trouble and needed to be saved from themselves.
That's the story on the tighter mortgage rules Ottawa introduced on Thursday. Ignore the complaints from people who make their living through the buying and selling of houses. They're not primarily interested in whether people make sound financial decisions when they buy into the overheated housing market in some cities.
The federal government is keenly interested, and for good reason. Although today's buyers are meeting banks' borrowing standards, many are taking on excessive debt.
Both Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have talked a lot about the risk that a rise in interest rates will make some people's current debt loads unmanageable. They should be so lucky as to have interest rates go up. That would require a turnaround in the global economy, and right now, the big worry is a new recession.
Higher rates are a longer-term concern, then. In the near term, there's the problem of people taking on mortgages that demand too much of their financial resources. Sure, they can cover the regular payments. But what about saving for retirement or their kids' university or college education? And what about their ability to withstand a financial shock like a job loss?
The government has decided to thin the herd of buyers by lowering the maximum amortization period to 25 years from 30 for people who require mortgage insurance because their down payments are less than 20 per cent. This change is effective on July 9, and it means higher monthly or biweekly mortgage payments. This in turn will keep marginal buyers on the sidelines until they save more or make more.
About 40 per cent of mortgages set up for purchases in the past 12 months used a 30-year amortization. But moving to 25 years isn't draconian - that was the unquestioned standard for decades before the increased amortization periods were introduced several years ago.
Many people are worried about what the new mortgage rules will do to housing prices, and with just cause. Investment dealer BMO Nesbitt Burns said moving to a 25-year amortization from 30 years is similar to a 0.9-per-cent increase in mortgage rates based on a five-year mortgage at 3.3 per cent and a loan amount of $290,000. Robert McLister, a mortgage broker and editor of the Canadian Mortgage Trends blog, said first-time buyers account for 35 to 50 per cent of the market. "First-time buyers have a lot of say in pricing," he said.
The government is also putting limits on refinancing mortgages by capping loans at 80 per cent of a property's value, down from 85 per cent. The government could have been tougher here. Enthusiastic use of refinancing has contributed to high levels of indebtedness.
Don't be angry with Ottawa for making it tougher to buy a home. You'll get your mortgage paid off sooner with a 25-year amortization and, if you can no longer afford to buy, you've been saved from borrowing trouble.
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ASK THE GLOBE
Will the new 25-year amortization be applied to a 30- or 35-year mortgage I already have and will need to renew soon?
Robert McLister, a mortgage broker and editor of the Canadian Mortgage Trends blog, said the new rules apply only to new government-insured mortgages after July 9. Existing mortgages with longer amortizations can be renewed as usual. However, those who increase their loan amount on renewal will have to amortize over 25 years.
I have signed a purchase deal with a 30-year mortgage amortization that closes after July 9. Do I need to renegotiate?
Mr. McLister said a 25-year amortization will not be required in such a case. However, he said people will need to go back to their lender if they have a mortgage commitment based on a 30-year amortization and have just begun house hunting.
Can I still use a 30-year amortization if I have a down payment of 20 per cent or more?
Mortgages with this level of down payment do not need insurance and thus aren't covered by the new rules. However, Mr. McLister said some lenders will most likely offer a maximum 25-year amortization for both insured and conventional mortgages.
What's happening with million-dollar homes?
The federal government says it won't provide mortgage insurance for houses in this price bracket, so buyers will need a down payment of 20 per cent in all but a few cases.
