Government changes rules for longer-term mortgages

The Canadian government has announced new rules for government-guaranteed mortgages.

In a press release, the federal finance department said the new regulations are designed to ensure Canada’s housing market remains strong by reducing the risk of “a U.S.-style housing bubble developing in Canada.”

The new measures include:   

• Fixing the maximum amortization period for new government-backed mortgages from 40 years to 35 years.

• Requiring a minimum down payment of five per cent for new government-backed mortgages.  

• Establishing a consistent minimum credit score requirement. 

• Introducing new loan documentation standards.  

The new limits take effect on October 15 to allow existing mortgage pre-approvals with the common 90-day duration to be used or expire. 

Certain exceptions would also be permitted after October 15. The government will work closely with all stakeholders to ensure timely and effective implementation of these measures. 

As these measures relate only to new  government-backed insured mortgages, Canadians who already hold mortgages will not be affected. In addition, private-sector mortgage insurers such as Genworth Financial, PMI Mortgage Insurance Co. Canada and AIG United Guaranty can continue to offer 40-year mortgages.

CMHC has an estimated 60 per cent share of the mortgage insurance market.

The finance department said the measures will build on the strength of Canada’s housing market. According to the International Monetary Fund, the increase in house prices in Canada is based on sound economic factors such as low interest rates, rising incomes and a growing population. 

A recent Statistics Canada report concluded that homeownership is at a record  level, with over two-thirds of Canadians owning their own home. 

Mortgage arrears — overdue mortgage payments — have also remained low. In recent years, the percentage of mortgages in arrears for three months or more continues to be at low levels not seen since 1990.  

“It’s the right move,” said Nick Kyprianou, president of Home Capital Group, whose subsidiary Home Trust Co, provides alternative mortgages. “Why get people overextended. Nobody wins by getting people right to the edge of the cliff.”

“I think you have a clear case of the government sitting down and looking at its risk exposure and wanting to review that,” said Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals, in response to the government announcement.

“They have financial guarantees in place for the CMHC and private insurers, and they are saying, ‘What is our risk and what is the risk to the Canadian taxpayer?’”

There is a trade-off when consumers sign up for longer-term mortgages — monthly payments are lower, but the interest paid greatly increases. The total interest on a $300,000 mortgage can soar from $286,161 over the life of a 25-year mortgage to $498,416 under a 40-year mortgage, which adds more than $200,000 to the cost of the home.

Thirty-seven per cent of new mortgages in 2007 were for terms longer than 25 years, according to the CAAMP.

According to analysts, the Canadian housing market would have slowed sooner if longer-term mortgages had not been introduced, which allowed buyers to bid on more expensive homes that they otherwise could not afford.

Concern regarding the ramifications of longer amortization periods had been expressed in May by the Bank of Canada and Finance Minister Jim Flaherty.

“They add to the momentum in the housing market,” said Bank of Canada Governor Mark Carney, “and if everyone has a 40-year amortization mortgage, then you just have higher housing prices.”