Saturday, January 15, 2011

Possible mortgage changes

You'll note the government has reigned in the CMHC twice since 2008 after opening the floodgates for loose lending in 2006:
  • 0% down, 40 year amortization CMHC insured mortgages were eliminated in October of 2008
  • 5% down, 35 year amortization CMHC insured mortgages were "pegged" to the 5-year fixed rate on offer moving forward from April 2010. 
It's possible, though how likely is a wide open debate at this time, the government reigns in the CMHC again in 2011. We've heard speculation from changing the impact condo fees have on the qualification criteria all the way to upping the down-payment requirement and reducing the amortization period from 35 years to 30, perhaps even 25.

We've been having a discussion as to the effects this will have on people's ability to purchase a home in Victoria. Here it is all laid out for you. I used TD's mortgage calculator to generate these graphics. I used $400K as the mortgage amount and the "special offer" 5-year fixed rate to base the calculations on. The only thing I changed was the amortization period.

The total monthly payment changes $130 with a 5-year reduction in amortization and then $330 with a ten year reduction in amortization.

For a little perspective on the impact this may have, let me consult the most recent CAAMP survey on the state of mortgage financing in Canada:
  • 16% of Canadians with a mortgage could not manage an extra $300 increase in mortgage payments.
  • In addition, 11% of households would run into financial trouble if mortgage rates rose only 1.5%.
In other words, 16% of current Canadian homeowners wouldn't be able to afford a $400K mortgage if amortizations dropped from 35 years to 25 years. Victorians don't have above average household incomes compared to their peers across Canada so we can safely say this kind of mortgage qualification change would be felt here in the first time buyer single family home market.

I think the likeliest change to come will be a reduction in amortization periods from 35 to 30 years. It's a small pill for Canadians to swallow at this time. I also think there's a fair probability that fixed interest rates climb over the calendar year, perhaps even by 1%. If that occurs, it has the combined effect equal to dropping the amortization to 25 years:

Minor tweaks, yet they may impact about 16% of the market. I know I'm reaching a bit with this analysis. But a bit of "what if" context is necessary to broaden the discussion, no?

UPDATE: While not official, it's about as close as it gets until tomorrow. 30 year amortizations and HELOC clamp-down coming. (H/T Reid). I expect a similar time line to last year's changes: no earlier than mid-April for implementation is my guess. Expect a short-term "busy" period in the market between now and then as people scramble to buy now before the rules change. I'd be expecting banks to almost-immediately implement the new rules, although current pre-approval terms will likely be honoured.


a simple man said...

16% will be enough for a lot of people to be over their head and underwater.

A lot of people in Victoria are just hanging on by their fingernails already, but seem to care little. We know people who are worried their businesses are going to go under, but are still going on extended trips to hot locales. Others are working multiple jobs to keep up with their expenses. Others are maxing out their home-secured LOCs.

Taxes are going up, services are going up in price, everyone is getting squeezed from all directions. Are wages increasing concomitantly? No.

This is not going to end well, and lately I am concerned that it is going to result in a lot more suffering for everyone than I once thought.

Changes in amortization will be one thing, increases in the prime rate another, but inflation is also a factor.

And let's remember - there is a lot of inventory to hit the market this spring...who knows how much.

The tipping point is close.

Dave said...

HHV, I agree, I think you will see a drop to 30 years, and thats about it, Anything more would really kill the housing market.
30 year amorts along with higher rates is going to be bad enough.


Just Jack said...

It may hurt the market here, but not where it counts in the Windsor-Quebec corridor. Moving the amortization down by 5 years isn't going to be enough. There has to be other restrictions on CMHC insured non owner occupied dwellings. If the Conservatives don't ratchet down the market, they are going to do another Mulroney to themselves.

For all those people who have moved here from other parts of Canada, you are going to experience why BC'ers distrust Ottawa.

omc said...

Just from my impression of the media manipulation this time around, I am not expecting much at all. It started out hot and heavy with some stats and facts being stated, but lately it seems like they are trying to sweep it under the rug. Most press I have seen lately has a definite cant, and tries to lead the reader to say "let free market rule. Even though, off course, CMHC manipulation has nothing to do with free market at all.

I am expecting some sort of token BS about home equity loans. Completely useless, and of no effect to the obvious problems. The economy is far too tippy to actually do anything before an election.

Animal Spirit said...

Whatever decisions that are made will be focussed on keeping the majority of homeowners in Canada in a reasonable financial position. In other words, the policies and regulations would meet the needs of the majority if Canadian citizens - i.e. Ontario, Quebec, Alberta.

B.C. is such a statistical outlier in terms of mortgage debt and prices that whatever policy impact is felt elsewhere will be magnified by a factor of 10 here.

WorldtravellerPlus said...

I actually don't want any rule changes. I would like this bubble to keep inflating so that it really goes pop in a few years. It is much more powerful when a bubble pops on its own and all the chickens come home to roost. What we really need in the long term is for CMHC to be wiped out and/or require huge taxpayer infusions. That will cause a huge backlash and perhaps once and for all we can rid ourselves of this distorting influence.

Marko said...

I think you guys would be interested in some new stats the VREB is collecting via monthly questionaires to Realtors who are involved in transactions.

Below are some data for 2010.

3. How did the buyer finance the purchase?

Conventional mortgage (20% or more down payment) Response # 701 Reponse % 53.23%

High ratio mortgage (less than 20% down payment) Resposne # 311 Response % 23.61

All cash Reponse # 305 Reponse % 23.16

4. Did the buyer use federal RRSP Home Buyer's Plan Yes - 10.29%, No - 71.67, Don't know - 18.04%

6. Where did the buyer move from

Within Great Victoria - 70.55%
Up-Island - 4.32%
Lower Mainland - 4.39%
Outside Vancouver Island and Lower Mainland but within BC - 2.24%
Outside BC, but within Canada - 15.03%
Moved from outside Canada - 3.47%

Email me if you want the full PDF or let me know how to attach it.

a simple man said...

Thanks Marko - I think Tim Ayers used to post similar data.

Anyway, 24% in a high ratio mortgage. That is higher than I thought. Any only 23% did not need a mortgage, lower than I thought.

Just Jack said...

Those percentages seem reasonable to me. After a decade of annual double digit growth, most people should have tons of cash to put down on a home.

Although it doesn't make sense to me why anyone would not finance at these low rates and keep the rest in investments. I would think that those putting exactly 20 percent down would be 75% of new home purchases. Perhaps they approach their bank for financing after the sale.

That leaves roughly a quarter of the market using high ratio financing - and I would assume that a good many of these would be condominium purchases. 25 percent seems to be a big chunk of the market. One in four buyers being sub prime? It just seems really high to me. But maybe not, given how the volume of CMHC insurance has skyrocketed. I don't know if the level of sub prime lending got that high in the states.

Waiting said...

Had an interesting chat with a realtor at an open house today. He said that, in his opinion, the recent tightening of mortgage lending had made the market more balanced but he felt that any further tightening (35 to 30 yrs) and/or a rise in interest rates would, in his words, 'cripple' Victoria's housing market. Just one persons opinion but I hope he's right! I can't believe the crap on the market right now for all time high prices. Guess I'll hunker down in my rental a bit longer.

Reid said...

Here is what you have been looking for:

New Mortgage Rules

kabloona said...

Reid, you beat me to it.


In short the changes are as follows:

1) lower amort to 30 years from 35.
2) reduce max heloc percentage from 90 to 85 percent.
3) change cmhc rules to lessen government backed insurance for helocs, details unkown.


HouseHuntVictoria said...

Marko, you can likely confirm this, but I was speaking with a neighbour of that house on Tampico Pl that just sold for $660K. He told me that the family had been living there for about 3 years or so. After they pay their agent, they will have made $2K on that place in three years. Prime Gordon Head location, nice big house, albeit needing updates... thought that was interesting.

phil said...

Decided to pop in to a random open house today. 70’s bldg, visible water stain damage everywhere common areas, 700 sq ft 1 bd, wobbly little deck with view of parking lot, undulating floors (foundation problems) covered with cheap wrinkled laminate, mostly original fixtures/windows/cabinets/doors, ten dollar walmart blind (noted as a feature on the feature sheet), $240000, $200 per mth assessment.

“So what“ typical Victoria starter condo, right. But crunch the numbers, EXCLUDING the immediate special assessments the new buyer will be on the hook for (elevator/seismic/fire upgrades) and you realize you must be in the twilight zone.

Even if you ‘pretend’ the condo`s reserve fund can handle most of the other upcoming assessments this decade (rotting decks, old leaky windows, roof, original boiler, mold remediation, etc), the monthly outflow EXCLUDING principal pay down (35 yr amort) equals $1550/mth.

Here’s the crazy thing, guaranteed you could rent the condo (or one just like it) for $750 or less. So, more than twice the amount for the exact same thing.

phil said...

But it gets worse. What if, like the above rent vs buy calculation suggests, the condo falls in half in the next ten years? Or worse, rates rise even modestly making your monthly $2000+, whilst your condo value falls by 2/3rds. Meanwhile, if you simply rented the same condo and invested the spare $800/mth saved well, I’ll let you punch in the numbers to an annuity formula.

Needless to say it’s far FAR more than double (triple to quadruple) to own versus rent the exact same thing, in this the twilight zone.

Marko said...

"Marko, you can likely confirm this, but I was speaking with a neighbour of that house on Tampico Pl that just sold for $660K. He told me that the family had been living there for about 3 years or so. After they pay their agent, they will have made $2K on that place in three years. Prime Gordon Head location, nice big house, albeit needing updates... thought that was interesting."

Yes, I can confirm this. They are making 2k on this house if they ignor the fact that they paid $11,200 in property transfer tax when they bought it.

Marko said...

Sorry, my bad, sold for $635,000 in 2007 so PTT would have been $10,700.

Marko said...

At the end of the day 660k is still more than 635k.....the fact they probably lost money is a result of taxes and real estate commission not the market.

HouseHuntVictoria said...

^ Marko, thanks for checking into that.... even if we look at it straight up, that's a 4% increase over almost 4 years. That house didn't keep pace with inflation. In one of Victoria's most sought after areas right now. And you can't really point at that home and say there was anything wrong with it.

Mr.4AM said...
This comment has been removed by the author.
Mark said...

No increase to the down payment required.....disappointing.

It isn't enough but who cares, the little RE Juggernaut just keeps rolling along.

This won't "cripple" anything.

I can say this, I have heard a lot more talk lately about RE in Vic being way overpriced and unjustifiable....this is new in my circles.

Let's see what the spring brings! Lot of listings coming and then we will see what happens when those that "need" to sell start lowering prices.

a simple man said...

So the changes (from

- The maximum number of years the government will back a mortgage was lowered from 35 to 30.
- The upper limit that Canadians can borrow against their home equity was lowered from 90 per cent to 85 per cent.
- Government insurance backing on home equity lines of credit, or HELOCs, has been removed.

The change in amortization is in the right direction but stops short of the station, the change in the upper limit is laughable, but I am interested in the last change - if the banks are now responsible for covering the HELOCs will they significantly tighten up their lending standards for people using their houses as ATMs?

Mark said...

if the banks are now responsible for covering the HELOCs will they significantly tighten up their lending standards for people using their houses as ATMs?