Reactions were definitely mixed – some positive, some negative, but none over the top – to Finance Minister Jim Flaherty’s January 19th announcement of tighter Canadian mortgage rules come this spring.
Mr. Flaherty announced three changes that will come into force on March 18: reducing the maximum amortization period for a home mortgage with less than 20 percent down from 35 years to 30 years; lowering the maximum amount available through refinancing to 85 percent of the values of a home; and, withdrawing government-backed insurance for a home equity line of Credit (HELOC).
“The government made it very clear that changes were forthcoming,” Boris Bozic, President and CEO of Merix Financial, told the Canadian Real Estate Magazine. “The only question was the depth of changes, and what impact would it have on the market,” he observed; adding, “Clearly the government consulted with all major stakeholders, and it appears they went to some length to find common ground.”
Jim Murphy, the president of the Canadian Association of Accredited Mortgage Professional (CAAMP) expressed some dissent, telling CTV News that the CAAMP would have preferred leaving 35 year amortizations in place but requiring borrowers to qualify for a 30 year mortgage in order to get the longer amortization.
“None of these measures will be popular with mortgage brokers and realtors, but Canadian debt levels were climbing to alarmingly high levels,” said David Larock, an independent mortgage planner, in a report by the Globe and Mail. The onetime employee in a big bank’s mortgage department told the Globe, “I don’t like it, but for the long-term health of our market I think it’s short-term pain for long-term gain.”
Of the three measures, the elimination of government-backing for HELOCs garnered the most criticism. “Some supervision by banks and governments is fine, but adults look after their own debt levels, observed the Globe’s financial reporter, Rob Carrick. “Those non-stop warnings that debt is bad?,” he asked rhetorically, “They’re for the the financial children out there.”
That may be the case, but the government, lenders and mortgage brokers have a role to play in ensuring that potentially problematic mortgage products are not written for underqualified borrowers. Yet, at least in respect of HELOCs, that already seems to be the case, and the removal of government-backing for HELOCs may be a moot point.
“(W)hile there may be instances of lenders charging more to clients who set up new home equity credit lines or requiring better credit scores from applicants, the status quo should rule in many cases, Mr. Carrick writes. He notes, as an example that both the Bank of Nova Scotia and the Canadian Imperial Bank of Commerce said “there would be no changes to their home equity credit lines related to the government announcement.”
Overall, the rules changes seem to be a prophylactic measure designed to reduce any potential overheating of Canadian mortgage markets, rather than triage to address existing problems.
