More Changes For The Mortgage Market?
Mortgage regulators may not be finished with their rollout of policy changes; it has been recently reported that OSFI, the national regulator for financial institutions in Canada, is considering further limitations on maximum mortgage amortizations. However, this time around the changes would target conventional mortgage buyers – those who pay more than 20 per cent of their home purchase down payments.
OSFI is contemplating cutting amortizations to a maximum of 25 years, down from the current 35. This would follow the same limitations placed on high ratio borrowers last summer – the results of which are still being felt throughout the Canadian housing market.
The Impact of Home Buyer Barriers
Last year’s restrictions, which also enforced new credit score requirements, debt-to-income ratio criteria, and limited HELOCs to 80 per cent of a home’s loan-to-value ratio, effectively cut some buyers out of the market. A Maritz survey conducted for the Canadian Association of Accredited Mortgage Professionals (CAAMP) found 16.9 per cent of the high ratio mortgages sold in 2010 would not have qualified under the new rules.
In fact, 62 per cent of of the $960-billion-worth of mortgages financed by Canada’s big banks are high ratio and require default insurance backing from the Canadian Mortgage and Housing Corporation.
Any new changes made by OSFI would be among efforts to minimize the threat posed by these buyers, who are more likely to default on their mortgages – a severe symptom experienced by the U.S. housing market that the Canadian government is looking to avoid.
Is Amortization the Answer?
While the fallout of last year’s changes was felt almost immediately – sales fell 7.8 per cent from August to October nationwide – this round would affect a much smaller buyer pool. Only six per cent of mortgages taken out last year have an amortization between 30 and 35 years – and 79 per cent of buyers – both low-and-high ratio – have amortizations up to 25 years, according to CAAMP’s findings.
The school of thought on longer amortizations is that they give borrowers the leeway to take on more debt than they can realistically afford. However, as reported by Canadian Mortgage Trends, a recent study shows long amortizations are not a prominent cause of mortgage default – lack of home buyer equity topped that list.
The idea is that by forcing buyers to save for longer, more home purchases will be made with savings, and not dependent on IOUs.
Debt Risk is the True Target
Debt carried by Canadian consumers is public enemy number one to the Department of Finance, as it puts Canada’s banks in a vulnerable position in the face of another economic downturn.
Canadian banks were recently deemed“too big to fail” by OSFI, meaning they’re vital to the overall survival of Canada’s entire economy. This has prompted measures to ensure more of their assets and capital are based on stable income such as consumer deposits, and not risk-based business.
The Bailout Burden
This aversion to debt also brings light to our banks’ symbiotic relationship with the CMHC, which currently insures $560 billion in mortgages for Canada’s lenders. As CMHC is a crown corporation, any losses from mortgage default are covered by Canadian taxpayers. But what should happen if a severe market downturn leads to defaults en masse? One BMO Capital Markets analyst indicates that our big banks would be on the hook to cover such losses.
While the event of the CMHC going belly up is highly unlikely, preemptive caution may be a contributing factor to the latest round of proposed changes. As for how they’ll further impact the mortgage market as a whole – only time – and buyer trends – can tell.
RateSupermarket.ca Week in Review
Looks like the downward pressure on five year fixed mortgage rates has eased off for now – the rate has held at 2.64 per cent over the last two weeks. The only movement seen on the Best Mortgages table this week is for 10-year fixed mortgage rates, which dropped to 3.54 per cent from the previous 3.57.