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Did Ottawa go Too Far with New Mortgage Rules?

20 November 2012

There’s little doubt that the latest round of mortgage rule changes have significantly impacted the mortgage and housing market in Canada already. Sales in September dropped by 15 per cent, and while last month was a bit busier, October still showed a 7.8 per cent slow down in home sales across the country. It’s this kind of a cool down that one economist at the Canadian Association of Accredited Mortgage Professionals says is going to be bad for the Canadian economy as a whole.

It was Will Dunning from CAAMP that stated that the new mortgage rules have gone too far. In a report published yesterday Dunning states,

“The opinions being expressed by this author are his own, and are strongly felt. The changes to mortgage insurance criteria are unnecessarily jeopardizing the health of Canada’s housing markets and the broader economy.”

Those rules to insured mortgages of course, is that anyone who wants a high-ratio mortgage (one in which less than a 20 per cent down payment was given) will need to also take on a 25 year amortization period to go along with it. This, in addition to the cost of mortgage insurance, could add hundreds or thousands of dollars to a homeowner’s monthly mortgage payment, as they’ll have much less time to pay back the loan.

Dunning also estimates that about 16.9 per cent of high ratio mortgages that were approved two years ago wouldn’t get the same approval today. But, Dunning also points to CAAMP stats that show that 55 per cent of mortgages in this country are high ratio mortgages. If that were true, perhaps there may be a bigger reason for concern, as the new rules would affect about half of homeowners in the country.

Luckily, it’s not. The amount of high ratio mortgages in Canada currently sits at around 3 – 5 per cent, which means that only a small percentage of homebuyers will be affected by the new rules surrounding insured mortgages.

Dunning also continued on in his report to say,

“The U.S. experience has showed us that what starts as a small drop in housing prices can spiral into a dreadful outcome. This report is not concluding that the same thing will happen in Canada, but it is pointing out that the revised mortgage insurance criteria is unnecessarily raising economic risks in Canada.”

But the same thing won’t happen here in Canada, and these mortgage rules are the very reason for it. The U.S.’ housing market tanked because anybody who wanted a mortgage got one – whether they were qualified or not. These new rules are making it harder to get a mortgage, so that we can ensure that only those most qualified buyers (or those willing to pay a hefty price) get one.

What do you think? Have the new mortgage rules gone too far? Or are they exactly what Canada needed to keep our economy from spinning (in that downward spiral) out of control?

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