The effects and defects of the new mortgage regulation was analysed by Robert McLister in his blog post. This was an excellent article. Therefore I wanted to run some numbers to check the regulation out.
Now let us take an example of Joe going to buy his dream house with the help of CMHC insuring his mortgage as he has only 20% down payment. Surprised? You think that if you have 20% down payment then you do not have to get a CMHC mortgage default insurance? That notion is correct and incorrect, both. There are lenders who want a CMHC insurance for every mortgage they write and some goes as low as 65% Loan to value ratio.
To keep this story focused on the topic, let us assume Joe makes $80,000.00 a year has a $300.00 car payment per month. He and his wife loved a home which worth $500,000.00 and he has about $75,000.00 in cash for closing cost, so he can put about 10% down. Joe went on-line to measure the depth before putting an offer. He stumbled across the qualifying rate concept and decided to calculate how much he qualifies for – to his surprise he found that he qualifies for only a $360,000.00 mortgage. With that rate – at his best he can buy a home worth $420,000.00
| Salary (Yearly) | Loan (monthly) | Rate | Amortization | Maximum Mortgage |
|---|---|---|---|---|
| $80,000.00 | $300.00 (car) | 5.24% | 30 Years | $360,000.00 |
| $80,000.00 | $300.00 (car) | 5.24% | 25 Years | $330,000.00 |
| $80,000.00 | $300.00 (car) | 3.90% | 30 Years | $420,000.00 |
| $80,000.00 | $300.00 (car) | 3.90% | 25 Years | $380,000.00 |
| $80,000.00 | $300.00 (car) | 3.09% | 30 Years | $465,000.00 |
| $80,000.00 | $300.00 (car) | 3.09% | 25 Years | $415,000.00 |
Totally confused Joe went to work next day and asked his colleague about her mortgage. She said that she has about $450,000.00 outstanding in her mortgage. Upon further discussion Joe found out that a rep from XYZ bank helped them to get that. Without further question Joe obtained the phone number of the rep.
When Joe finally could reach the rep, he was told that if he selects a 5 years fixed mortgage then the qualifying rate would be 3.9%. With a 30 years amortization that qualifies him for a mortgage of $420,000.00. So, now he can go up to $480,000.00. Unfortunately that jump in qualification – without breaking a sweat – still would not qualify him for the home of his choice.
Finally he called a broker who told him that he can qualify for a 3.09% rate under some special conditions and that would make him able to buy that $500,000.00 home. Moreover if he can squeeze some more funds then he can do it within 25 years which would help him save some money on premium.
Last time when the government announced the qualifying rate requirement for variable rate mortgages then the intention was to discourage borrowers from taking excessive risk. Since then fixed rates went below discounted variable rates. This time the government has announced reduction in amortization period for the insured mortgages – for now it will be difficult to qualify a borrower for a higher mortgage amount. This new rule certainly will affect the demand in the market.
Media coverage:
- With a 25-year amortization, you can throw a mortgage burning party sooner and put more money towards other financial priorities – BMO
- “Investing in a home is a great way to save. That is the dream that mortgage insurance was intended to support. The measures we are taking today maintain that intended purpose.” – Minister Flaherty
- Canadian Bonds Up as Government Tightens Mortgage Rules – WSJ
- These are appropriate, they’re prudent, they’re timely, and … along with other measures that have been taken, they will contribute to reducing what is the number one domestic risk in our economy – Mark Carney – BMO
- Don’t be angry with Ottawa for making it tougher to get into the housing market. You’ll get your mortgage paid off sooner with a 25-year amortization -Rob Carrick – Globe and Mail
- It was a tacit admission the economy is too iffy to allow the Bank of Canada to raise interest rates – Toronto Star
- Home sales will accelerate very briefly over the next couple of weeks before the July 9th implementation period. – Financial Post
- This means the consumer will not be a major factor supporting activity, and the housing market until now an engine of economic growth will be a lot softer – Bloomberg
- Not all economists have been calling for a clampdown. – Financial Post
- 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 – CBC
- The country’s banks have had to walk a fine line on the issue of housing debt this year, acknowledging the risks of high consumer debt while competing on prices to hold on to their share of the mortgage market. – Reuters
- Going forward, we would urge the government to consider the impact of further interventions in the market carefully. – CREA
- The changes, which apply to government-backed insured mortgages, will mostly affect first-time home buyers looking to get into the condo market – Vancouver Sun
