If you would have asked me a month ago if the mortgage industry would be hit with another round of government regulations I would have said it’s possible, but HIGHLY unlikely.
After stating in April that he was not going to intervene in the housing market, Minister Flaherty suddenly thought different. On June 21st, Flaherty felt the need to make a drastic announcement implementing changes to the mortgage regulations to curb what could inevitably be the bust to a potential housing bubble.
We’ve seen a great example right before our eyes of what could happen to a thriving economy should the wrong pieces happen to fall into the right place. Our American friends have experience one of the greatest economic downturns in modern history. Greed mixed with poor regulation lead to a crippling effect to millions of US citizens, homeowners or not. Many other countries (Greece, France, Spain, Ireland, etc.) have or are experiencing similar downward spirals.
Minister Flaherty put some personal reasoning behind this government legislation, addressing comments and thoughts about his children now entering the market.
Out of fear of rising household debt, and the inability to increase mortgage rates to curtail borrowing, it was decided to protect all Canadian from themselves by implementing the following rules:
1. Changes effect insured mortgage loans starting July 9, 2012
2. Maximum Amortization reduced from 30 years to 25 years
3. Maximum refinancing now 80%, down from 85% loan-to-value
4. Maximum Gross Debt Service ratio of 39% from 44%
5. Mortgage Insurance will max out at a property value of $1 million
OSFI will be implementing their own changes late summer/fall, which include limiting the maximum loan-to-value on HELOCS to 65% (from 80%), having stricter rules on variable rate qualifications, increasing stated income proof and eliminating cash back mortgages.
Click here for a full listing of Q and A’s from the Department of Finance website.
THE CAUSE AND EFFECT
Our TMG President, Mark Kerzner points out in his blog “More Change to mortgage rules,” that these recent changes are even more drastic than those we have experienced in the past. He provides this example:
Moving amortizations from 30 years to 25 years is NOT the same as when they were reduced from 35 to 30 years. For example:
A $250,000 loan amount for 5 years with fixed interest rate of 3.29% the monthly P&I payments are as follows:
25 year amortization = $1,220.63
30 year amortization = $1,090.44 (The monthly cash flow difference between 25 and 30 years is $130.19)
35 year amortization = $999.86 (The monthly cash flow difference between 30 and 35 years is $90.58)
In this example the delta between the two is nearly 30% – a significant difference. In an economic report released this morning from CIBC it was estimated that “the direct impact of this move alone might cut the value of mortgage originations by close to 2%.”
Kerzner also notes that the unfortunate bystander in these changes is the first-time homebuyer. CIBC published a report showing habitual borrowers to be skewing the debt-to-income ratios and the over 45 year-olds nearing retirement, were a demographic with rising risk, two groups that won’t be as harshly effected with these changes.
First-time buyers looking to put less than 20% down will now need to put more money towards living expenses each month. They will save on interest costs and be out of mortgage debt faster, but it might come at a cost of less discretionary income or paying higher interest rates on other forms of debt such as credit cards or lines of credit.
CHANGE FOR THE GOOD
We are definitely headed for change, but that’s nothing new, that seems to be standard with the housing industry. However, change doesn’t necessarily mean bad. Canada will hopefully come out stronger because of these new rules and perhaps if the market drops as it’s expected, first-time homebuyers will still have the opportunity to get into the market with a home that is priced sensibly while mortgage rates are still at all time lows.
I still believe real estate is a great long-term investment. The changes will require buyers to take more time to understand their financial position and assess how they want to move forward. Meeting with a mortgage professional and a financial planner are great ways to start planning and preparing for purchasing real estate.
Interest rates are expected to remain low, coupled with the potential lowering house prices, buyers will likely have negotiating opportunities instead of bidding wars. Further more, homeowners maybe able to take advantage of upgrading their home at a savings to earlier prices. This could pay off well if you have the time to wait for the sale of your current property while having an offer on or looking for your second property.
For those needing to sell, I recommend looking at the option of renting your property, that is, if it makes sense to do so. Projections are for rental rates to increase as rental availability decreases with fewer buyers in the market. If you look at the States today, its more expensive to rent than it is to buy in nearly every major city. However, most Americans are still not in a position to buy due to income, credit rating requirements or bank lending capabilities. I don’t think we will experience this extreme, but I think we will have a similar effect. Lenders are already getting much tighter with their mortgage lending.
If you have to sell, there can be ways to come out ahead. Search for other areas or type of properties that may have dropped more/similar in price to what you experience with your home. Look to buy unique properties (one in a million, not one of a million) that should sell more quickly if you needed to sell again in a down market. Doing a bit of personal research and spending time with your Realtor to understand what is happening in the market now can make a big difference to your return on investment.
It was a shocking month to the housing industry, but in speaking with Mark Kernzer, I think he summed it up best with “It’s surprising, it’s unnecessary, but it’s not the end of the world.” We’ll make it through this bump in the road – just as we have every other time!
From my home to yours…