Economists Applaud New Mortgage Rules
Canadian Government Moves to Avoid U.S.-Style Housing Bubble
Canadian politicians are often labelled prudent, but rarely proactive. That all changed this summer when the federal government announced a few minor, but important, changes to the country's mortgage lending rules.
A few years ago, in an effort to encourage first-time homebuyers, the government scrapped the minimum 5% down payment required for a new mortgage covered by the Canada Mortgage and Housing Corporation (CMHC) and extended the amortization period to 40 years. Canadian law requires homebuyers to purchase CMHC insurance if they make less than a 20% down payment on their new home.
Back then, the changes made sense. Canada's housing market was booming and few were aware of the crisis looming south of the border.
The New Housing Market Reality
Fast forward to 2008. The U.S. housing market is in turmoil and foreclosures continue to rise at an alarming rate. The largest mortgage lenders in the U.S., Freddie Mac and Fannie Mae, which collectively hold more than half of the country's estimated $9.5 trillion mortgage debt, are treading water, sparking concerns that the U.S. government may be forced to intervene.
Let's be clear though, the U.S. mortgage crisis has not filtered into Canada. True, housing starts are slowing, but not dramatically. Still, there's always a risk when your closest trading partner runs into economic trouble of any kind.
Changing the Canadian Mortgage Rules
With that in mind, Ottawa has re-instituted the minimum 5% downpayment for CMHC-insured mortgages and reduced the highest amortization period to 35 years.
The revised rules also require higher credit scores for potential borrowers and more stringent loan documentation.
In a statement, the government suggested the revisions were an effort to reduce the risk of a U.S.-style housing bubble developing in Canada.
What the Mortgage Experts Say
TD economist Pascal Gauthier says shortening the amortization period by five years won't have much of an impact on the housing market. For the average-priced Canadian home (currently about $310,000), the savings will amount to a relatively modest $55 a month. “The greater dampening impact on sales will come from the arguably prudent requirement of a 5% minimum downpayment,” Gauthier notes. “The new rules should reduce the already low systemic risk of rising Canadian mortgage delinquencies.”
On the other hand, the changes will raise homebuyers’ costs and push away potential buyers at the lower end of the income and credit spectrum, says BMO Nesbitt Burns economist Douglas Porter. “This will create an incremental drag on already decreasing home sales.”
Still, most economists are onside with the changes. After all, anything that could potentially protect Canada from the investor confidence woes and homeowner angst currently plaguing the U.S. can't be a bad thing.
The new rules are scheduled to take effect on October 15, 2008.
