No more 30-year amortizations

Update June 21: I received an email from a mortgage broker which states the following: “If you have a client on the fence if they produce a contract within the next 2 weeks (to July 9th) they will be subject to the old rules until December 2012.”

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The government will reduce the maximum amortization period for a government-insured mortgage, lowering it from 30 to 25 years, and also drop the upper limit that Canadians can borrow against their home equity from 85 per cent to 80 per cent. The government expects less than 5% of home buyers will be affected by the changes.

If you were paying attention, you’ll understand that this only affects mortgages where the down payment is less than 20%. Additionally, Ottawa will limit government-insured mortgages to home purchases of less than $1 million.

Derek Holt and Dov Zigler, economists, Scotia Capital: “Home sales will accelerate very briefly over the next couple of weeks before the July 9th implementation period.”

The announcement marks the fourth time in four years that the government has clamped down on mortgage rules, with the latest being just last year when the maximum amortization was dropped to 30 from 35 years.The tighter rules will come into effect on July 9.

This should have the effect of dampening demand(and consequently lower prices), as fewer buyers will now qualify, considering a shorter amortization period demands higher payments. On the flip side of that coin, it will also mean homeowners build up equity in their homes faster.

Read more Ottawa tightening mortgage rules

Will this new measure achieve the government’s goal of a soft landing without pushing the market into a correction that goes too far? I would have preferred to see the amortization left alone when it was at 25 years in 2006. Will we see a last-minute rush by buyers to get in under the wire?

6 responses to “No more 30-year amortizations

  1. Garth Turner announces the end to the real estate bubble:
    “The 30-year mortgage is finished. So is the bubble.”

    http://www.greaterfool.ca/2012/06/20/the-little-f-bomb/

  2. Here’s a look at how economists are evaluating the moves and their implications for the slowly recovering Canadian economy:
    What the analysts say

  3. The analysts make no mention of the new OSFI rules. The OSFI also made a few announcements this morning, one was in regards to ‘Down Payments’:

    “Cash back should not be considered part of the down payment,” says OSFI. This effectively eliminates 100% financing, and is one of the most common sense guidelines of them all.

    http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2012/06/osfi-toughens-mortgage-underwriting.html

    At today’s average price, a first-time condo buyer will need to put down $50k to get into the market. Most first-time buyers will be unable to buy into the market with 20% down. This will stall the market.

    • I believe that I misinterpreted this. I thought that the 20% was in regards to the requirement for a CMHC insured down payment.

  4. The Calgary Herald has some local analysis on the rule changes.

    The changes could price some people out of the housing market, said Ann-Marie Lurie, senior economist with the Calgary Real Estate Board.

    “So you would expect to see some of that sales demand cool,” she said. “We’ve had really strong sales demand this year. So even if it’s cooling, it’s not going to be a total reversal of what we’ve seen. It will impact demand as you’re pricing some people out of the market.

    “Another thing you’ll see is what people can afford will also change. We can expect this to have some sort of dampening impact on price growth as well. The single-family market has been fairly tight and prices have actually been increasing a little higher than expectations. This will actually bring it more in line for what we did expect originally for the year.”

    Read more: http://www.calgaryherald.com/business/Tighter+mortgage+rules+could+impact+Calgary+housing+market/6820108/story.html#ixzz1yTz2v8pN

  5. And oil dropped to $78:

    http://money.cnn.com/2012/06/21/investing/oil_prices/

    At least it was a beautiful sunny day out today!

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