Tighter mortgage rules threaten economy's recovery, brokers warnGarry Marr | Nov 19, 2012 7:31 AM ET | Last Updated: Nov 19, 2012 12:32 PM ET
New borrowing rules have hit homeowners so hard that it could undermine any economic recovery in Canada, says a new study from the country’s mortgage brokers.
The Canadian Association of Accredited Mortgage Professionals says since new rules went into effect in July, 2012, resale housing activity is 8% lower between August and October than a year earlier.
Among the changes instituted by the government was a lowering of allowable amortization from 30 years to 25 years for consumers borrowing with mortgage default insurance which is backed by the federal government. A longer amortization allows consumers to lower their monthly payment and qualify for a larger loan at the expense of paying more interest over their mortgage period.
CAAMP says 17% of the high ratio mortgages funded in 2010 would not qualify today, including 11% of prospective high ratio homebuyers who wouldn’t qualify under the new 25-year amortization rule.“This smaller number of first time buyers is already impacting the resale market, which in turn threatens to dampen economic activity more broadly,” said the group, in a release.
Jim Murphy, chief executive of CAAMP said his group’s survey of 2,000 Canadians shows the “vast majority” of mortgage holders are acting responsibly with their debt. “Our concern today is the number of growing first time buyers who are now unable to get a mortgage. We worry that this is having a dampening effect on what was an already cooling market and we hope policy makers will give some thought to addressing the needs of this key sector of the market,” he said.
Will Dunning, chief economist for the group, said the downturn in the resale market could be an indicator of what’s next for the market. “Since the government tightened mortgage accessibility for the fourth time this past July we’ve seen a drop in resale activity that I think foreshadows an overall decline in the housing market. My concern is that a policy-induced housing market downturn creates unnecessary risk that directly affects not just housing but job creation and the economy as a whole,” he said.
CAAMP said the impact of first-time buyers can be felt throughout the market as move-up activity is curtailed because those potential buyers find it more difficult to sell their entry level homes.
The survey found it doesn’t matter whether consumers take a 20, 30 or 40-year amortization — something available until three years ago — they end up paying off their mortgage in two-thirds of the time originally intended. Other findings show one-third of borrowers made additional or accelerated payments on their mortgage while 87% of homeowners have at least 25% equity in their homes.
Lower rates have been good for Canadians too. Of the respondents who renewed in the last year, 61% saw a reduction in their interest rate.http://business.financialpost.com/2012/ ... kers-warn/-------------------------------------------------------------------
While many mortgage agents have been in disagreement with the new mortgage regulations, I for one have always agreed with them 100%. They were needed to protect the interests of today's homebuyers in the future when rates are higher. The section I bolded above states that 17% of high-ratio mortgages funded in 2010 wouldn't qualify today. While that may be true, if you look at high ratio mortgages back in early 2008 when 5 year fixed mortgage rates were 5.99%, it is actually easier to qualify today than it was four years ago for those with decent credit scores.
For example, a $300,000 mortgage at 5.99% with a 40 year amortization would have a monthly payment of $1,633.23. A $300,000 mortgage today with a 5 year fixed rate of 2.99% amortized over 25 years has a monthly payment of only $1,418.20, making it easier to qualify for today's mortgage. It may be a little more difficult to qualify today based on appreciation over the past 4 years, but certainly not because of the new mortgage regulations.
One thing is for certain, and that is that rates won't always be this low. As soon as the global economy starts to improve, mortgage rates will start going back up to 'typical' levels (between 5% and 6%). At some point during the trek back up, we will most likely see a return of extended amortizations in order to keep mortgages affordable. Without them, many homeowners might find themselves in a position where they would no longer be able to afford their homes at time of renewal.
(reason for editing: formatting)
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Paul Meredith
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CityCan Financial (est 1976)
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