It’s the big day – the much bally-hooed mortgage rule changes decreed by the Department of Finance are now in effect. Put in place to cool the raging housing market and subdue Canadian household debt-to-income ratios, it’s clear what the government is trying to avoid through these measures: the toxic 160 per cent income to debt ratio levels that brought on the economic downturns of the U.S. and U.K.
While the rule changes are backed by good intentions – a long term goal of market stability – the short term implications might be anything but that. So, as the government steers the “big ship”, everyone from new build buyers to brokers are wondering –“Just what is are these mortgage rule changes going to cost me?”
Summary of the Canadian Mortgage Rule Changes
If you’re a regular reader of finance headlines (and this blog), you’re probably well-versed in these rule changes. However, a study conducted by BMO found about half of those surveyed were not aware of the new changes, and only 45 per cent were in the loop on the amortization decrease. If you’re among those not in the know, here are the cliff notes to get you up to speed:
- A decrease in the max amortization for high-ratio mortgages from 30 to 25 years
- A cut in the maximum refinancing amount from 85 per cent to 80 per cent
- A cap on GDS (Gross Debt Service ratios) to 39 per cent and TDS (Total Debt Service Ratio) to 44 per cent
- A decrease in LTVs from 85 to 80 per cent for refinances
You can read more about the details in our coverage of the announcement here:
It’s the fourth time in as many years that the government has made changes to the mortgage rules, and the third time amortizations have been slashed. Canadians saw a decrease from 40 to 35 years in 2008. Then, in January 2011, they were reduced again, down to 30 years max.
How much will the new mortgage rule changes in Canada cost home buyers?
First Time Home Buyers and the New Mortgage Rules
This is arguably the group most affected by a shortened amortization period. Right out of the gate, their buying power has shrunk. According to CAAMP, 40 per cent of home buyers last year required a mortgage over 25 years. Combine that with newbie buyers making up the majority of high-risk (under 20 per cent down) mortgages,and the amortization change means many have been priced out of buying altogether – and that’s the “desired” effect, according to Finance Minister Jim Flaherty.
Crunching The Numbers
So when it comes to actually paying off your mortgage, what’s the monetary hit? Well, almost 1 per cent more on your mortgage rate! According to the government, a 25-year mortgage (compared to a 30-year) costing $350,000 with a 3 per cent rate would increase monthly payments by $184. While the rationale is that interest rates will be decreased over the lifetime of the mortgage ($33,052 in this case), that’s a small condolence to buyers who are barred from the market now.
Then, you need to factor in the impact of the new qualifying ratio limitations – and this is an area where having better credit will make you a target (those with credit scores under 680 were already capped at GDS of 35 per cent). According to Canadian Mortgage Trends, “The new 39 per cent cap will lower the maximum theoretical mortgage by roughly $57,000, or 12 per cent, for a household earning $75,000. (This assumes a 3.09 per cent 5-year fixed rate with a 25-year amortization, no debt and 5 per cent down.)” With all of this factored in, it’s estimated that this can amount to 20 per cent less purchasing power for the home buyer.
Rental Market Competition
Instead of buying, this group of potentials are cooling their heels and focusing on their down payments for a few extra years – and they’re taking up space in the rental market while they’re at it. If you’re a renter living in a city with already-record low vacancy rates (like Vancouver, at 1.4 or Regina, at at 0.6 per cent vacancy) you’re going to feel the squeeze. Factor in that only 10 per cent of new builds are for rental purposes (CMHC), and this isn’t going to alleviate any time soon.
The new build market will also be feeling the effects. According to CAAMP, there are 95,000 first time buyers in the new builds market. Flaherty claims only 5 per cent of housing start buyers will be affected – but that equals to about 9,600 buyers annually. Demand for starts could peter out as the once-propelling force behind this market chooses to wait.
Stabilizing the Market?
The pool of home buyers is shrinking – so get ready for the pressure. Less buying power may mean sellers will be forced to lower their asking prices – and whether supply and demand will right the market remains to be seen. Seeing as housing-related activity accounts for one fifth of Canada’s GDP, let’s hope it’s for the better. And just how optimistic are Canadian consumers these days? Well, given news of European crisis, job creation concerns and a general sense of unease over personal finance, we don’t feel too spendy – according to the Index of Consumer Confidence, levels dropped to 74 for June 2012 – down from 83.1 in June 2011.
The Insider Effect
Home buyers aren’t the only ones feeling the effects of these changes. As the number of qualified borrowers shrinks, competition grows for their business – resulting in increasingly tough times for brokers who rely on high-ratio clientele. It’s estimated that as many as 15 per cent of these brokers could be pushed out of the business.
Less qualified buyers and higher bank competition could also lead to more rate wars – and seeing as Flaherty wasn’t too pleased the first time banks plunged below 3 per cent on fixed mortgage rates, this could be an area the changes just won’t be able to subdue – and it begs the question: how low can rates go? And what will be the effect when they inevitably go back up?