Ottawa revamps mortgage rules effective Oct 15
Effective Oct. 15, CMHC will guarantee loans only up to 35 years and require a 5% down payment. Will this motivate any buyers to get a house before the Oct 15 deadline?
Here's the story from the Globe & Mail:
The federal government, fearful of a U.S.-style housing bubble, has pledged steps aimed at keeping riskier borrowers in their rental units and away from homes they probably can't afford.
Canada's housing agency will no longer be allowed to guarantee loans with amortization periods longer than 35 years, a move that likely will end the surge in 40-year mortgages, popular because they allowed borrowers to reduce their monthly payments.
Prime Ministers Stephen Harper's Conservative government said Wednesday Canada Mortgage and Housing Corp. will also require a minimum down payment of 5 per cent to get government insurance.
Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney both expressed concern about the surge in 40-year mortgages over the past year, suggesting the loans were feeding a bubble.
The U.S. housing market collapsed last fall amid record defaults by homeowners who got loans during a period of easy credit at the start of the decade. U.S. officials say their housing problems continue to persist, and many economists say the market's woes have driven the world's largest economy into recession.
“Today's announcement marks a responsible and measured approach by the government to ensure Canada's housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada,” the Finance Department said in a news release.
The government also said borrowers will require a minimum credit score of 620 to qualify for a CMHC insured mortgage, and that it will demand stronger documentary evidence that borrowers can pay their loans.
The changes take effect Oct. 15 with few exceptions, Finance said in the release.
Economists at Scotia Capital in Toronto said the measures would have a limited impact on Canada's economy, which has gotten a boost from record home buying.
“The changes are more about optics, in comparison to a fairly modest impact upon the economy, housing markets or financial markets,” Derek Holt and Karen Cordes wrote in a note to clients.
Currently, home buyers can get a CMHC-backed mortgage – even one with an amortization period of four decades – with no money down. Such “financial innovation” only came to the market toward the end of 2006, and the “marketplace has been quick to adopt these innovations,” Finance said in a background document explaining the changes.
Still, the government sought to play down the impact of its housing measures on home buyers, while emphasizing that the growth in Canada's housing market is more boom than bubble.
By way of example, the Finance Department said reducing the amortization period to 35 years from 40 years on a loan of $200,000 at 6 per cent interest would result in a $41 increase in the borrower's monthly payment. That borrower would save $49,000 in interest payments over the life of the loan, Finance said.
The department took pains to note that the International Monetary Fund concurs with the government that the surge in Canadian house prices and building is explained by low interest rates, rising incomes and a growing population.
The government said it expects construction of new homes to remain at an annual pace of 200,000 new units for a seventh straight year in 2008, and that bank mortgages in arrears are stable at 0.27 per cent, near the lowest levels since 1990.