As we entered into the summer of 2012, the Canadian mortgage landscape was undergoing another overhaul of change. In what has become an annual tradition, Finance Minister Jim Flaherty announced changes to the mortgage rules. I have found it rather disconcerting to hear the odd random comment on what all this means to the future of the Canadian homebuyer, so I thought a little clarity may be of assistance. I would love to go on about the 'wisdom' of the government's latest decision to tinker with the mortgage rules in an ongoing effort to 'legislate' a change in our borrowing habits, but for now, I'll stick to a summary of what the new rules really are - and, more importantly, what they are not.
The most significant rule change is to the maximum amortization which has been moved from 30 to 25 years. The amortization is the period over which you can pay off your mortgage. It is easier to pay off a $300,000 mortgage if you can spread those payments over 30 years instead of having to pay it off in just 25. Having said that, the longer you take to pay that loan off, the more money you will pay in interest. So in some respects, Mr. Flaherty is doing us a favour. Other rule changes included a limitation to how much we can borrow on a line of credit (maximum 80% of your home value) and not allowing a high-ratio insured mortgage for homes that are valued over $1 million. So here's a few points to help maintain perspective:
These rule changes apply to high-ratio (insured) mortgages only. Many lenders are still allowing 30 year amortizations on conventional loans (minimum 20% down payment) for now.
The majority of homeowners do not have high ratio mortgages so these rules do not have an impact on them.
So who will this impact and how will it affect the real estate market? The difference between being able to take 30 years to pay off your loan as opposed to 25 will have a significant impact on younger couples looking to get into the housing market. First time homebuyers and those on a tight budget will find they simply can't afford to buy that larger home or, in the case of cities like Vancouver, the smallest of condos. There is no question that many young potential home buyers will be negatively impacted by these new rules and the fallout will trickle down to a slowdown in the overall housing market.
But isn't this exactly what Mr. Flaherty and company wanted in the first place? After all, he has been trying to convince Canadians for months that we are getting carried away with low-interest loans and becoming over-burdened with low-cost debt. He has warned us numerous times that if we do not get our spending under control before interest rates rise, we will be in for a shock. But Canadians didn't listen - instead we continued to take advantage of the low-cost debt to buy more real estate and as our debt increased so too did the real estate market. So if the people cannot be talked into changing their spending habits, they will need to be legislated into it. Will these new rules create the desired effect the government is looking for? Or, as many believe, have they gone too far this time and will the result be an overcorrection in the market place at a time when the global markets are already throwing us enough curve balls?
Here's my prediction: I fully expect lenders to adjust to the drop in volumes by counter-acting with lower rates to offset the impact of lower amortizations. This will lure borrowers back into the marketplace and by this time next year, Mr. Flaherty will be threatening the banks and not the borrowers. Time will tell who is right, but for now we are faced with another change in the lending landscape and we will adjust accordingly - we always do.
Peter Kinch is the author of The Canadian Real Estate Action Plan and co-author of the Canadian Bestseller - 97 Tips for Canadian Real Estate Investors. Peter Kinch Mortgage Team is located at Unit 201-101 Klahanie Dr. Port Moody, 604-939-8326 www.peterkinch.com.
