Thursday, June 21, 2012

More changes to mortgage rules

 Guest Blog by Mark Kerzner, President of TMG The Mortgage Group Inc.

The current round of mortgage changes introduced by Minster of Finance Jim Flaherty today, June 21, 2012 took me by surprise.

First a brief recap of the changes:
  1. All changes are in respect to insured mortgage loans 
  2. Reduction in the maximum amortization from 30 years to 25 years
  3. Reduction in the maximum amount Canadians can borrow to refinance their current homes from 85% to 80% loan-to-value
  4. Mortgage customers are going to be qualified on maximum gross debt service ratios of 39% and total debt service ratios of 44%
  5.  Maximum property values to qualify for mortgage insurance must be less than $1 million.
  6.  These changes are going to come into effect on July 9th as opposed to previous announcements that any changes would come with 60 days notice
  7. These changes are in addition to the changes previously announced by OFSI about limiting the maximum loan-to-value on HELOCs to 65%
What are the implications of these changes?

According to published reports of leading economists these changes are going to help facilitate a "soft landing". Many are commenting that they are prudent given the continued run up of the debt-to-income ratios and extended period of ultra-low interest rates.

My concern is that these changes have targeted first time homebuyers to a much greater extent which could have a more significant impact on the housing market in Canada. I still believe our housing market, our financial system and our national economic health are all very strong but there are implications.

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%."

In January of this year, CIBC published a report showing that debt-to-income ratios were skewed towards habitual borrowers. It went on to say "A rising share of the highly indebted are over 45 years old, an age where accumulating net assets ahead of retirement should be paramount. Canadians nearing retirement, who should be in their prime savings years, are, instead, getting themselves deeper into debt." This is clearly not the same group most affected by today’s change in policy.

Reducing maximum amortizations by another 5% will make the cost of borrowing more expensive for mortgage consumers who are on the margins. For those who, in the past, used this opportunity in a prudent manner to consolidate higher interest credit then used the cash flow savings to more aggressively retire debt, those options have just been reduced.

For those borrowers who do need to refinance and who are now unable to will seek out more expensive private, unsecured lending products and credit cards to do so. When you consider such a high percentage of mortgage refinance dollars were spent on home improvement and consumer spending, I am concerned about the impact of this change on the economy as well.

Setting a $1 million mortgage insurance limit on property values is clearly going to target the larger urban areas such as Vancouver, Calgary and Toronto.

Why did these changes come into place?

Clearly the extended ultra-low interest rate environment we have been experiencing lately has spurred borrowing and had a positive impact on home prices across Canada. The Governor of the Bank of Canada, Mark Carney had been hinting at his desire in recent months to raise rates. This change gives Carney room to NOT raise interest rates. In fact, if the global economy does worsen, he may, in fact, have the ability to lower rates. A TD Economics report released today asserted that the tighter restrictions can target the risk more directly and have roughly the equivalent impact to a 1% increase in interest rates.

The global economy is still in bad shape.  While we have all been reading the headlines about Spain, Greece, the elections in France, etc., our world financial leaders must believe we are in for prolonged economic recession. As such, there is no time soon when interest rates are likely to rise. The Government decided to target the mortgage debt as a means to deal with the Bank of Canada's inability to raise interest rates.

I am disappointed, though. It was just two short months ago on April 10, 2012 that Flaherty was quoted as saying "I have no present plans to intervene in the housing market in Canada…there has been some moderation in the market of late. I would prefer the market itself to correct to the extent a correction is necessary."

 This reminds me when former US President George Bush said "Read my lips, no new taxes."

What do we do now?

I believe more strongly at this moment than ever, that Canadians should and MUST consult with a mortgage broker. After all, there is no channel more knowledgeable and informed than the broker channel in Canada. Secondly, changes are happening fast. There is no 60-day notice period. If you want to purchase or refinance, talk to your mortgage broker today.


No comments:

Post a Comment