Finance Minister Jim Flaherty has outlined new rules aimed at reining in a hot housing market and ensuring Canadians aren’t taking on more debt than they can afford.

Flaherty laid out a series of changes to the rules that govern the Canada Mortgage and Housing Corporation, the Crown corporation that effectively oversees the housing market by insuring the vast majority of Canadian mortgages.

The most important new change is that the maximum amortization period has been reduced to 25 years, down from 30. The longer a mortgage is spread out, the lower the monthly mortgage payments are — but the more the borrower ends up paying overall over time.

The impact of the change is likely to be significant. It’s about the same as a 0.9 percentage point increase on a typical mortgage, Bank of Montreal economist Robert Kavcic noted.

Indeed, the numbers add up. A $300,000 mortgage spread over 30 years at 4.0 per cent would cost $1,426 a month to pay back. That same mortgage amortized over only 25 years increases the monthly payment by $152 or 10 per cent to $1,578 a month.

Ultimately though, the higher monthly payment saves the borrower money in the long run. The total interest payments are $213,558.91 on the 30-year mortgage, but only $173,416.20 on the 25-year one.

The shortened amortization is also likely to affect a huge segment of the market, as about 40 per cent of all new mortgages were amortized over 30 years last year, the Canadian Association of Accredited Mortgage Professionals estimates.

Anyone who needed or wanted a 30-year mortgage before is going to have to qualify under tougher 25-year requirements now.

Ottawa has now moved three times to rein in the maximum mortgage term, since the CMHC briefly started insuring mortgages with 40-year terms in 2006. The limit was brought down to 35 years, then 30 and now the more traditional 25.

“The reductions to the maximum amortization period since 2008 would save a typical Canadian family with a $350,000 mortgage about $150,000 in borrowing costs over the life of that mortgage,” Flaherty said.

“Our government has encouraged Canadians to borrow responsibly,” Flaherty said. “Most Canadians have done so.”

At 25 years, the maximum amortization period for CMHC-backed loans is now back to where it had historically been before the Harper government began raising the period after taking office in 2006.

Interim Liberal Leader Bob Rae made that very point in question period on Thursday, asking Prime Minister Stephen Harper if raising CMHC’s limit to 40 years in the first place was a mistake.

“The government has altered rules a number of times and will continue to do so on a prudent and flexible manner depending on the circumstances,” the prime minister replied.

Refinancing limit set at 80%

Flaherty also outlined a few other measures today:

The government has lowered the total amount that Canadians can withdraw when refinancing their homes to 80 per cent of the home’s value, from 85 per cent.

“This will promote saving through home ownership and encourage homeowners to prudently manage borrowings against their homes,” Flaherty said.

Flaherty also moved to cap the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent in order to get CMHC insurance. Banks calculate the former by adding up mortgage payments and property taxes on a home loan, and dividing by the borrower’s income. The latter adds in other debt payments such as lines of credit and credit cards to the top side of the ledger.

Although they both have obscure, technical names, they’re both effectively just limits on how much debt a borrower is allowed to take on as a percentage of their overall income. That move, too, is aimed at making sure borrowers can’t bite off more than they can chew.

The final change was to limit CMHC insurance to homes priced under $1 million. “Wealthy people can borrow whatever they want from banks, and they can work that out from banks,” Flaherty said. “That is not my concern.”

July deadline

That effectively means that a homebuyer who wants to purchase a home for more than $1 million can’t get insurance on it — which in turn means the buyer will have to come up with the 20 per cent down payment requirement in order to get an uninsured mortgage.

So under any circumstance, any new borrower wanting to buy a home of $1 million or more is going to have to put $200,000 down at a minimum. That’s also likely to have a major impact on a comparatively small segment of the market.

“Although this could create some market dislocations in the just-under-$1-million segment, it’s consistent with CMHC’s recent efforts to focus its insurance business on encouraging owner-occupied purchases among average Canadians,” BMO economist Michael Gregory noted.

All of the changes will be in effect as of July 9, 2012. In the interim, the action in hot Canadian housing markets is likely to get even hotter, experts say, as borrowers scramble to get in ahead of the more stringent rules.

“As we’ve observed around prior mortgage rule changes, some housing market activity will likely be pulled forward ahead of the implementation date,” Kavcic noted.

But there’s likely to be a subsequent pullback, too, he says. The last time Ottawa tinkered with CMHC rules, home sales fell by three per cent in the two months following the implementation date.

The Canadian Real Estate Association reacted coolly to the news on Thursday, calling it a “measured response” to rein in debt loads, but taking pains to note that the home resale market contributes $20 billion a year to Canada’s economy and as such, is deserving of caution.

“Going forward, we would urge the government to consider the impact of further interventions in the market carefully,” CREA said.

Source: CBC

The Office of the Superintendent of Financial Institutions (OFSI) sent ripples through the industry March 19th, releasing “draft recommendations” for all federally regulated banks to follow.

We have now learned that the OSFI intends on getting these guidelines finalized for the end of June or early July, with implementation potentially immediate, but most likely within a month or two of the official announcement. Bank CEO’s have been informed of these time frames and are beginning to prepare for what could be a large shift in the way the big banks underwrite mortgages. Here are the highlights from the guidelines (available at http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/sound/guidelines/b20_dft_e.pdf):

* Home Equity Line of Credit mortgages reduced from 80-per-cent financing to 65-per-cent financing.

* Lines of credit to be either amortized, or amortized after a specified period of time (no more never-never plans).

* More stringent income requirements for self-employed borrowers.

* All mortgages to be reviewed upon renewal (currently as long as payments are made, it is unlikely for a bank not to offer a renewal to a client).

* Funds from cashback mortgages are not allowed as a source of down payment (currently only a handful of lenders allow this, but it does mean that “zero down” mortgages are technically available, but with some restrictions.)

* Use of the five-year posted “benchmark” to qualify uninsured terms of one to four years and all variable terms (currently most lenders use a three-year posted or a lower rate to qualify uninsured mortgage.)

* More limits on underwriting exceptions (many recent applications don’t fit the ever shrinking “boxes” with the banks, which means fewer common-sense deals will get approved.)

* Home insurance to be included in debt-servicing ratios (it is currently not included.)

* More public disclosure of statistics pertaining to institutions’ mortgage practices.

* More accountability from management to ensure lenders are adhering to their underwriting guidelines.

Since announcing the proposed guidelines, the OSFI has reviewed comments from the industry and it is changing its opinion on a few items. First, it is becoming more likely that 65-per-cent financing on lines of credit is a done deal, although officials are probably scrapping the idea of a forced amortization on these credit lines. However, the most important comments from the OSFI’s review of the feedback has been that they are likely to withdrawal the requirement to re-qualify at renewal, which has given many in the industry a sigh of relief.

Although many of these above guidelines sound reasonable, having all of these changes come into effect at the same time could have a negative impact on housing markets short term. Potential purchasers may find it more difficult to obtain financing, and investors may find it harder to leverage existing assets to acquire additional properties.

Many in the industry feel that these changes are the government’s way of slowing down accumulation of secured debt and the housing market without raising interest rates.

The Bank of Canada announced June 5 no change in the prime rate, and the consensus is no further changes until early 2013. Many fingers on this decision pointed to ongoing concerns with the European (and therefore worldwide) markets, as well as a relatively strong Canadian dollar and inflation levels at comfortable levels. Until the Euro is more stable, money will continue flooding from European markets to North American markets, keeping interest rates low for borrowers.

For borrowers, this presents a double-edged sword. No longer should they be worrying about getting the best rate on their mortgage (many lenders are currently offering 3.09 per cent on five-year fixed rates), but should be more concerned about getting the money at all. If you are planning on making a purchase this year, the window (especially for investors) may be closing soon.

What is interesting is that these rules are going to be affecting all federally regulated institutions, so we may find that credit unions may be able to offer niche products (like lines of credit over 65 per cent) that major banks won’t be able to offer.

Credit unions will often follow federal guidelines, but may feel that their risk to lend to high-quality clients may not be as severe as the OSFI feels and continue operating on their current guidelines. It might be time to develop a stronger relationship with your credit union again.

Source: Kyle Green, Mortgage Alliance Meridian Mortgage Services Inc.

The Bank of Canada on Tuesday said it was keeping its trend-setting interest rate on hold and acknowledged risks from the European crisis are leading to a “a sharp deterioration” in global financial conditions.

The central bank kept its lending rate at a near-historic low of 1% – where it has been since September 2010 – and pointed to weaker expectations for global economic growth.

“Some of the risks around the European crisis are materializing and risks remain skewed to the downside. This is leading to a sharp deterioration in global financial conditions,” the bank said in its statement accompanying the rate decision.

“The outlook for global economic growth has weakened in recent weeks.”

Many economists have pulled back on their forecasts for a rate increase before the end of the year, while others are now speculating rates could actually come down if global uncertainty continues.

Tuesday’s rate decision comes as Finance Minister Jim Flaherty is to join his Group of Seven counterparts on a conference call to discuss Europe’s debt crisis and the fallout within the region’s banking sector. Bank of Canada governor Mark Carney was also expected to take part in the talks, along with other G7 central bankers.

“The eurozone is slowing and has now affected Germany and France, the so-far more resilient economies in the eurozone,” Otto Waser, chief investment officer at Research & Asset Management AG in Zurich, told Bloomberg Television.

“We see some policy response emerging. We’re going to be talking more rescue measures in Europe. I don’t think that’s going to really stabilize the economies.”

On Wednesday, the European Central Bank will meet to decide on its key interest rate, ahead of critical meeting of European leaders on June 28 and 29 called to discuss the debt and banking crisis.

In Canada, economic growth in the first quarter of this year was just 1.9%, on an annualized basis, matching the fourth-quarter increase, as consumer spending slowed to a three-year low.

On a monthly basis, gross domestic product edged up 0.1% in March from February.

The Bank of Canada had forecast growth in the first three months of 2012 at 2.5%.

“While the U.S. economy continues to expand at a modest pace, economic activity in emerging-market economies is slowing a bit faster and a bit more broadly than had been expected,” the bank said Tuesday.

“More modest global momentum and heightened financial risk aversion have reduced commodity prices.”

The central bank acknowledged that growth was “slightly slower than expected” in the first quarter, “underlying economic momentum appears largely consistent with expectations.”

“In particular, housing activity has been stronger than expected, and households continue to add to their debt burden in an environment of modest income growth.”

However, the bank slightly rephrased its view of excess capacity in the economy, characterizing it as “a small degree,” rather than the “somewhat smaller” than anticipated wording in its previous rate statement.

“To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary stimulus may become appropriate.”

Source: Gordon Isfeld, Financial Post

The Bank of Canada may be thinking about raising interest rates but there’s apparently no need because Canadians are hunkering down to cool debt obligations on their own.

“The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon,” says Benjamin Tal, deputy chief economist at CIBC World Markets.

He wrote a report released Wednesday that suggests central bank intervention is not needed, especially with consumers already seeing interest payments on debt eating into 7.3% of their disposable income as of the fourth quarter of 2011, even at today’s low rates.

“Why are you raising rates? To slow down credit growth — but it’s already slowing,” Mr. Tal says. “I say let the market slow naturally. We are so concerned about this but it’s moving in the right direction.”

Toronto-Dominion Bank economist Francis Fong also weighed in, suggesting Canadians have begun to get the message about having too much debt, based on the slowdown in consumer credit growth.

Even the chief executive of one of the big five banks joined the discussion, hoping to extinguish some of the panic about Canadian debt.

“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” said Gord Nixon, chief executive of Royal Bank of Canada “Frankly, I’d like to see the rhetoric come down a little bit.”

The CIBC report does note that as of March 2012, mortgage debt rose by 6.3% on a year-over-year basis, which is below the average rate of growth seen in the past two years of 7.3%.

Mr. Tal says there will be a gradual softening in the housing market with prices falling 10% in the coming year or two. He says tougher rules from regulators on loans will cool the market and notes the banks themselves are questioning values, citing “the increased use of full-scale appraisals as part of the adjudication process.”

Overall, Mr. Tal says that for the first time since 2002 consumer credit is rising more slowly than in the United States.

“Consumer credit [growth] is basically zero,” he says, adding Canadians have been optimizing their credit situation by taking high-interest credit card debt and transferring it to lines of credit.

TD’s Mr. Fong agrees that Canadians are starting to “hunker down” and pay off their debt, but at the same time he suggests a two-percentage-point increase in rates would leave many households at risk.

Source: Garry Marr, Financial Post

When will the Bank of Canada raise rates? Bank of Canada governor Mark Carney surprised few with the announcement on April 17 that the overnight lending rate (from which prime rates are derived) would remain unchanged. His comments, however, has begun large changes in rate-hike predictions. BMO has already moved its prediction for the next rate hike from mid-2013 to end of 2012, and many are expected to change their outlook. Swap traders are pricing in a 90-per-cent chance of a rate hike by the end of 2012.

With all of the negative news circulating globally, why have things changed so much over the past few months? Here’s what we can take out of the Bank of Canada’s comments:

1. Growth will be watched more closely than inflation. Economic growth forecasts have increased from two per cent to 2.4 per cent over the past month, as 82,300 jobs were created in March (a reduction of 0.2 per cent unemployment). Because there is so much money sitting on the side-lines, growth is a good indicator of potential inflation. Inflation was just under the two-per-cent target at 1.9 per cent in March.

2. Carney is now forecasting that Canada’s economy will return to full capacity in the first half of 2013, three to six months earlier than originally forecast. Full capacity is the limit at which the economy can grow without excessive inflation.

3. Global economic factors are improving. Greece’s bailout helped calm down European markets (especially bond markets). Carney predicts a strong second half of 2012 for Europe.

The above factors, combined with a constant reminder that consumer debt in Canada is above the comfort zone, may see rates rise more quickly than anticipated. Five-year bond rates (which heavily influence fixed rates) shot up nearly 0.1 per cent after the Bank of Canada announcement, anticipating a quicker recovery than originally forecast.

Don’t hit the panic button just yet, though. We have all been through times of positive spring numbers only to be disappointed by the summer, so expect the Bank of Canada to be cautious when evaluating a rate hike. Last spring most banks and economists had predicted the prime rate would be at four per cent by fourth quarter 2011, only to drastically change their outlook by summer and into fall. If the economic momentum carries through the summer and into third quarter, it would be expected that we see a reasonable .25 per cent increase in third or fourth quarter this year.

Source: Kyle Green is a mortgage broker with Mortgage Alliance Meridian Mortgage Service Inc.

Just less than half of BC households could comfortably afford their homes if interest rates were to climb by just two percentage points, a new survey has found.

The BMO Bank of Montreal survey found that while most Canadian households could survive a stress-test against the possibility of rising interest rates, one in five said a two-percentage-point rise in rates would hamper their ability to afford their home and a further 20 per cent said they didn’t know.

In BC, where Vancouver is home to the priciest houses in the country, 48 per cent said they could still afford their home if rates went up by two percentage points. 32 per cent said they could not afford their mortgage if rates went up two percentage points, while 20 per cent of respondents were not sure.

Although the survey is based only on borrowers’ perceptions, it’s still very alarming, said John Andrew, real estate professor at Queen’s University. “It’s alarming because we’re only talking about a two-per-cent increase here, and it shows how borrowers have become acclimatized to low interest rates.

“We have no experience with this because mortgage rates have never been this low. We’re in virgin territory for everybody.”

In Vancouver, new mortgages average from $500,000 to $600,000, said Carolyn Heaney, BMO’s area manager specialized sales and mortgages for Vancouver.

The report coincides with the end of BMO offering two low-rate mortgage options — a 2.99 per cent five-year rate and a 3.99 per cent 10-year rate, both of which are limited to 25-year amortization and have limited prepayment options. Using the 2.99 rate as a baseline, the monthly payment on a $500,000 mortgage would be $2,364 for 25 years, Heaney said. If the rate went up to 4.99, the payment would jump $541 a month to $2,905.

“As a consumer, while there is no guarantee where rates are going, I think most of us can speculate that rates will be going up in the next couple of years,” Heaney said. “Let’s say in three years you’re going to be asked to pay $2,900, what kind of impact will that have on your cash flow?”

According to BMO Economics, interest rates are expected to increase beginning next year.

Andrew said he wouldn’t be at all surprised to see a much larger rate increase — of six or seven percentage points — in five years’ time.

“I think that’s entirely within the scope of possibilities,” said Andrew, who is also director of the Queen’s Real Estate Roundtable. “We know it’s highly competitive for banks right now. Are they going to turn you down if you couldn’t keep up the payments at four or five per cent? I’d be surprised if that’s the case.”

Andrew said the survey results are even more concerning when total household debt is considered.

“Mortgages are a big part of the problem, but they’re not the whole problem,” Andrew said.

Many other lenders followed BMO’s lead, offering low-rate mortgages, sometimes with more flexibility; several other lenders have already pulled their low-rate offerings.

Alberta had the strongest responses to the survey with 73 per cent of households saying they could handle an increase in rates, with just 13 per cent saying it would cause a problem.

The Leger Marketing survey was completed online from Feb. 21 to 23 using Leger Marketing’s online panel, LegerWeb. A sample of 1,500 Canadians over age 18 were surveyed. A probability sample of the same size would yield a margin of error of plus or minus 2.5 per cent, 19 times out of 20.

Source: Tracy Sherlock, Vancouver Sun

The clock is about to strike midnight for mortgage rates that have been the best deal of the past half century — at least as far as the major banks are concerned.

Bank of Montreal’s recent cut-rate 2.99% five-year fixed closed mortgage is set to expire today and, not surprisingly, competitors have already signalled they are ready to raise rates in the wake of the sale ending.

Royal Bank of Canada and Toronto-Dominion Bank were the latest to do so, announcing they had ended their offer of a 2.99% rate on closed four-year mortgage. Bank of Nova Scotia had quietly been telling mortgage brokers last week that it had planned to do the same.

“Some second-tier lenders have also raised their rates,” says Rob McLister, editor of Canadian Mortgage Trends. “You can see the timing [of the latest increases]. It is the day after the BMO rate expires. Typically when a bank puts out a posted rate it takes effect the next day but they’ve given it a lead time here.”

Royal Bank and TD said their rate increases are effective March 29. Both banks will raise the rate on their special fixed rate offer on a four-year closed rate by 50 basis points to 3.49%. The banks also raised the rates on a five-year closed variable rate mortgage to 20 basis points above prime.

Mr. McLister said the delay in raising rates could create a sense of urgency among consumers as they try to get themselves pre-approved for a mortgage which allows them to hold a rate for anywhere from 90 to 120 days.

“We have definitely seen increased volumes in inquiries and it seems like it has front-loaded action in the spring housing market,” he said.

It was almost three weeks ago that BMO triggered another round of mortgage rate wars with its 2.99% rate — the same product it offered in January. Critics complained the deal included restrictions like a 25-year amortization and limited prepayment privileges.

While the Banks are raising rates, smaller lenders like credit unions continue to offer five-year rates below that 3% threshold on five-year mortgage.

For the banks, it was inevitable that they would raise rates given rising governing bond yields which are generally used to price mortgages.

“It does look like the tide has turned on the bond market,” said Doug Porter, deputy chief economist with Bank of Montreal, adding it is pushing consumers to lock in rates. Bond yields have climbed about 50 basis points in the past two weeks on the five-year government of Canada bond.

Mr. Porter cautioned that the bond market has been hard to predict in the past so he can’t rule out market conditions changing yet again. “We’ve had a number of selloffs over the years in the bond market and the bull market has come running back with a vengeance so you never want to say never. It does seem like things have shifted,” he said.

It’s still unclear what it will mean for the spring housing market which could get a boost from low rates and early warm weather.

“Historically when potential buyers get a whiff that things may be shifting on the interest rate landscape, it often pulls anybody on the fence off of the fence,” says Mr. Porter.

Source: Garry Marr, Financial Post

Concerns about the sustainability of the high-flying Canadian housing market are “legitimate,” especially in the largest cities, the head of one of the country’s biggest banks said Tuesday as a price war rages across the financial sector over mortgage rates.

Bank of Montreal chief executive officer Bill Downe told the bank’s annual meeting in Halifax that soaring household debt levels are highlighting the need for a soft landing in the residential real-estate market. As a way of tightening lending, Mr. Downe said he supports a move toward shorter amortizations on mortgages in Canada to reduce consumer exposure to debt.

“We took a long, hard look at the Canadian housing market and concluded there was a legitimate concern that house prices – particularly in the largest cities – had been rising at a rate that was simply unsustainable,” Mr. Downe said.

“With growing concerns over household debt, a soft landing in housing is in the best interests of our customers and the national economy.”

His comments come as the banking sector battles to win market share for home loans by offering historically low interest rates. BMO in particular has come under fire from rivals for undercutting the market, offering five-year fixed rates at historically low rates of 2.99 per cent, and 10-year fixed rates at 3.99 per cent, forcing other lenders to match with similar offers.

Toronto and Vancouver are often singled out as overheating housing markets. Toronto’s average home price in February jumped 10.6 per cent from a year earlier to $454,470, as bidding wars for properties in sought-after areas often go well above the asking price. Despite a pullback in sales in Vancouver, prices there remain double the national average at $806,094.

Mr. Downe said BMO’s decision to focus on offering 25-year amortizations, as opposed to 30-year terms, is to direct consumers into loans that have lower costs over the long term. But RBC argues that BMO’s mortgage campaign involves terms that are less flexible and could prove costlier for borrowers if they run into financial trouble or need to refinance.

RBC argues that BMO’s cut-rate mortgages, which have shaken up the market, lack flexibility measures such as the ability to skip payments if needed, without penalty. The bank argues many people end up using such payment holidays at some point during the term of the loan.

BMO counters that such features add costs to the loan in the long term, because interest keeps accumulating. Both banks have taken out national advertising campaigns trying to poke holes in each ‘other’s offers in recent weeks.

Mr. Downe suggested he believes regulations may soon lean toward shorter amortizations. A year ago, the federal government announced it would no longer backstop mortgages with 35-year amortizations, making the maximum 30 years, as a way to tighten the lending market amid fears over rising consumer debt.

U.S. 10-year Treasury bond rates have increased 60 basis points since September, Mr. Downe said, a sign of upward pressure on interest rates in the future.

Source: Rob Carrick, Globe and Mail