There’s been a lot of press and chatter about the federal government’s tightening of mortgage rules since it was announced on June 20th. In fact, today I was asked by two separate people regarding my thoughts on the matter. I’m not sure what news they’ve been reading, as they were really put-off and unclear about the changes…changes that would likely not affect them.
So here it is: as of today (although, many financial institutions changed their policies last week) the following changes are in effect:
- The amortization period for new CMHC insured mortgages is now 25-years, down from 30-years. However, this only affects high-ratio, insured mortgages (ie. mortgages with less than 20% down).
- CMHC will no longer insure high-ratio mortgages on properties with a sale price of >$1,000,000. So if you want a million dollar home, you need at least 20% down.
- Home equity loans cannot be more than 80% of a home’s assessed value, down from 85% previously.
I see these changes as a good thing and targeted mostly to first time homebuyers. Frankly, if for the next five years the real estate market continued its appreciation like it has for the last five years, I’d be a worried future Cameron. These changes represent a much needed cooling, without the effects of dumping a bucket of ice water on the market. Previous to today, it was pretty easy for a first time buyers to become quickly overextended by taking on large mortgages…especially when rates eventually inch up from their current historic lows.
For more seasoned buyers, the impact should be minimal.
First, the wise investor can still take advantage of the 30-year amortization–to reduce their monthly payments and allow more of their monthly income to be invested elsewhere–as long as they are getting a conventional mortgage (ie. >20% down). And people with existing 30-year mortgages can likely renew and keep their 30-year amortization. In my mind, if you can’t afford the 20% down…you likely can’t afford the principle value that a 30-year amortization provides.
Second, the amount of people buying million dollar homes and requiring CMHC insurance is a small sliver of the market. Typically these buyers are on their third or fourth home and have at least $200,000 in equity. Especially those who have been in the Toronto market during the last decade. Again, if they don’t have this amount down, they should be reconsidering their million dollar homes.
Finally, I believe the 80% loan to value ratio is also a good thing. It provides a nice safety cushion for people looking to leverage the equity in their homes. By maintaing a healthy 20% reserve, they would be somewhat sheltered should anything ever happen to dampen the market.
Generally, I see this as a positive and responsible move for Canadians and the real estate market.