Today, in an interiew with CTV’s Question Period, to be aired next week, Canadian Finance Minister, Jim Flaherty, said that the Canadian government is looking at the changing regulations in the mortgage market and “measures will be taken if there’s evidence of excessive demand in the housing market”.
This comes after the Bank of Canada’s announcement last week that they are concerned that Canadian consumers are taking on too much household debt at the moment, due to low interest rates, especially mortgage rates which are currently near all time lows. And home owners need to start factoring in an increase in interest and mortgage rates (2-4%) over the next few years, to make sure they can still handle their debt payments.
The Finance Minister specifically identified two measures that could be taken:
1. Raising the minimum down payment from 5% ‘to a higher figure’
What this means is that the government would be forcing Canadians to save more money in order to afford a higher down payment on any house purchases. For example, the minimum deposit on a $300,000 mortgage today is 5% or $15,000. Although no specfic number was identified today, if this were to go up to 10%, the minimum deposit needed would be $30,000 (10%).
This would force Canadians to pay higher down payments, thereby, enforcing more financial prudence before they could buy a house, and would reduce the number of people who could qualify for a mortgage, which would acheive there goal to slow down the housing market.
2. Reduce the amortization period ‘from a maximum of 35 years to something less’
The amortization period is the number of years a mortgage holder takes to pay back the loan. The current maximum term is 35 years (reduced from 40 years in October 2008), and if this were reduced (again no specific number was identified) to 30 years, that would effectively increase monthly mortgage payments, as you would have less time to pay the home loan back.
What is the government trying to do?
Flaherty is basically looking at ways to try and cool down the housing market if it gets out of hand. So this is a warning shot towards the main driver at the moment, low mortgage rates. As Flaherty can’t control mortgage rates, this is the Bank of Canada’s job and they are independent, he’s looking at changing regulatory measures within his control that will curb the enthusiasm for buying houses. Raising the minimum downpayment will reduce the number of people who could qualify for a mortgage, especially at the lower end of the market, where new and first time home buyers who are just on the brink of being able to buy a house, won’t be able too.
While decreasing the maximum amortization period would, increase the minimum monthly payments home owners could make on their mortgage, again decreasing the number if people who could qualify.
Is this good or bad?
Looking at the measures seperately, we believe Good and Bad.
Taking the first one – increasing the required deposit amount. We believe this is a good thing. As shown in our example above, if someone were forced to save an extra $15,000 to take out a $300,000 mortgage, they would have to save or borrow more money from family and friends, making it harder for them to buy, especially for first time home buyers. This would force more prudence, reduce the number of people able to qualify for a mortgage and provide a more stable, less leveraged mortgage market.
Secondly, decreasing the maximum amortization period, could put homeowners in a challenging situation when rates increase in the future, as the government has forecasted. Many mortgage holders at the moment who are paying back their home loans over 35 years, can actually qualify or afford to repay based on a 25 year term with higher payments. They choose a longer repayment term as it provides more flexibility and reduces risk – as they can increase payments when times are good and reduce them when times are bad. Taking this option away and making them pay higher amounts all the time simply increases their risk, which could put added pressure on people when rates increase.
As always, make sure to compare mortgage rates and speak to a licensed mortgage specialist about your personal situation before making any decisions on your mortgage