Today was another big day in the mortgage business. The finance minister announced some large changes to mortgages in Canada.
A quick summary of those changes is as follows:
1. Non-owner-occupied properties must have a 20% down payment
2. Maximum financing on a refinance is 90% (instead of 95%)
3. Variable rate mortgage qualifications have been standadrized (sort of)
The video blog below explains these changes, and also gives my commentary on the changes. Enjoy!
Transcription of the Video Blog:
Rowan Smith: Hi, everybody. It’s Rowan Smith from the Mortgage Centre.
As many of you are aware, today on February 16, the government made some announcements as to some changes that they are going to be enacting on mortgage lending in Canada.
These changes were largely the result of the banks going to Ottawa hat in hand and pleading that there was some requirement for some changes. The mortgage industry was getting ahead of itself. Many people were citing there was a bubble and that kind of thing.
I’ve always found this mentality of the banks claiming that the government has to rein in their private lending practices to be a strange one at best. That’s very akin to a car dealership going to the government to say, “We need you to enact laws that make our cars less fast because the clients just like them too much, and they’re buying them all up. We have to provide them. We have to do whatever they want.”
I’ve always thought that was a very strange argument. It just plays out doubly strange here with the banks, who could choose if they wanted to simply to not offer the products that they feel are risky. But they know they’ll lose market share, and so rather than do the right thing, they have the government go and legislate laws instead.
So what were the changes? Well, the first thing is they have enacted some sort of policy regarding the qualification for variable mortgages.
There’s a big discrepancy right now between the rates you pay in a variable mortgage — as low as 1.9% — and rates that you’re paying on fixed mortgages, which if you’re taking a similar five-year term you’re going to be paying around 3.69% or somewhere in that range.
If you’re looking at those two different rates, that’s almost a two percent full difference based on exactly the same amount of debt. So how do you as a borrower justify taking such a substantially higher fixed rate? A lot of people haven’t been; they’ve been opting for the variable.
The problem is a lot of them need that variable rate in order to qualify, and that is a problem, because that is going to be testing affordability shortly. If rates rise, those same people could be in a lot of trouble.
The government has said that from now on, you have to qualify using the five-year fixed rate. What they haven’t said is what five-year fixed rate they’re going to be using. It could be posted rates. It could be the five-year discounted rate. It could be some government-mandated five-year rate.
Let’s not forget: discounted and posted rates are both something that are set by the banks. So if they don’t use a government-mandated rate, that means the banks are still free to adjust posted rates and manipulate how people qualify for variable-rate mortgages.
I’m not too sure how that one’s going to play out yet. We need a little more clarification.
The second thing they’ve done is restrict refinances from 95% loan to value. So you can no longer borrow right back up to 95% and take your home back to the hilt, you can only do it at 90%.
We sat there talking in our office about this today, and it doesn’t really seem like that was a product we were really using much. I think I can count one in the last two years where I’ve had to do a refinance to 95%, and that was really more of a husband buying the property off of his wife and refinancing it through a divorce.
So it’s not a product that’s used very often. It’s odd that they jumped on that one. The rationale is that of course that they want to force homeownership to be a bit more of a savings account, if you will, then people refinancing and using their home as a piggy bank.
The last rule and change that came down had to do with investor properties, so properties when it’s not going to be owner-occupied. Previously you could buy a property as a rental with 5% down. Now you faced some very heavy CMCH premiums to do that, but it was at least something that was technically possible.
Well, the new move by the government is going to restrict all non-owner-occupied properties to requiring a 20% down payment. That’s a substantial market in the Vancouver market, especially all those properties in Columbus and Fall’s Creek and downtown Yaletown that have cropped up. A lot of those condos are investment.
A lot of those people probably got pre-approved with 5% or 10% or maybe 15% down, and they’re going to be forced to complete with 20%. The question that’s going to remain to be seen is: do they have that money?
They didn’t think that this rule would be coming down the pipe when they probably went into those offers, so I suspect we’re going to see a bunch of miscompletions again due to the rule changes, like we did the last time CMHC rules got changed by the government.
The investor market, in my opinion, comprises a very large portion of the Vancouver condo market. In the outlying areas, it’s not such a big deal. But nonetheless, I do think that we’ll have a material impact on the investor demand for properties and could affect pricing in the market at large.
Overall, I think these moves are probably good to try to stave off an American-style bubble. The government’s been good about proactively jumping on this. I don’t know if I agree with the choice of products that they’ve gone after. I don’t really know how that’s going to play out.
Certainly the rental market was getting ahead of itself, and 5% down on a rental property was probably a little bit excessive. It was probably a little too wide open, and they’ve reined it back in to a more respectable level.
If you have any questions or comments on this, please leave them. I’d love to hear other people’s take on this. For the Mortgage Centre, I’m Rowan Smith.