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New Mortgage Rules – Is it a Good Time to Sell?

January 25th, 2011 6:12 PM

I have run the gamut of thoughts on this one. My first reaction was that these new regulations were sound, prudent and responsible changes that would support a strong real estate market and strengthen our credibility in the international financial sector. However, as I reviewed historical financial policies and statistical evidence of credit card and loan interest rates, percentage of mortgages in arrears, mortgage penalty calculations, my thoughts have changed and only wonder why other policies that would go much further in reducing, not only consumer debt, but also provider gouging.

It seems it was only two or three years ago that a 50-year amortization period was being bantered about. Thoughts of Europe were bouncing through my head where mortgages seem to be passed from one generation to the next. It was in 2008 when the federal government said you could no longer get a CMHC (Canada Mortgage and Housing Corporation) insured mortgage with 0 down and up to a 40 year amortization period. CMHC is a government-owned corporation and, in Canada, the largest insurer of mortgage loans.

In 2008, the amortization period was reduced from 40 years to 35 years and the down payment to at least 5% down. The government also required that if you had a government insured mortgage you had to have a minimum credit score. I for one applauded this move but wondered if it was enough. It was OK in the short term as interest rates continued to fall and housing prices continued to rise in many of the major centers. However, in the Kootenay/Boundary the number of sales declined and overall housing prices started to fall. Experience dictated that it was only a matter of time when major centers will also experience that downward shift. In 2010, the Greater Vancouver Real Estate Board indicated that the number of sales had decreased 14.2% from 2009 which was 10.3% below the ten-year average. The residential benchmark price hit a peak in April 2010 and has decrease 2.6% to December 2010. What would the consumer do when the mortgage amount was greater than the market value? Would they walk away? Would CMHC be on the hook? When I reviewed statistics regarding the % of Mortgages in Arrears there does not seem to be a crisis. Though they have basically increased since 2006, they are below 1%; much lower than credit card defaults.

In 2010, the government announced further changes for borrowers:

hough you could get a mortgage at a lower rate, you had to qualify at a variable rate or short term mortgages at bank posted rates;
Refinancing was capped at 90%;
Investment/recreational properties would require 20% down payment;

They also discussed standardizing mortgage prepayment penalties. Still nothing on that, as this is something that would certainly help Canadians.

Now our latest change: on January 17th, 2011, the Finance Minister, Jim Flaherty, announced further changes to government-back insured mortgages:

The Amortization period be reduced from 35 years to 30 years;
The loan to value ratio when refinancing a home will be reduced from 90% to 85%; and
Government insurance on home equity lines of credit are no more (this has the most impact)

The changes to the insurance guarantee framework will come into effect on March 18, 2011. Change to lines of credit will come into force of April 18, 2011. My opinion is that a 25 year amortization period is healthier and if you are taking more than 30 years to pay off a mortgage, it is not financially responsible. Also, if you had planned on getting a home equity line of credit for a home renovation or other reason, it will be much more difficult and this could be a problem. My reason for saying this is that I doubt the financial institutions will be likely to issue high ratio lines of credit without CMHC insurance. Policies, I’m sure will be changed but not to the benefit of the consumer.

These seem to be prudent measures when you consider that interest rates are at an all time low and consumer debt of Canadians is at an all time high. The concern is that when interest rates start to rise, many borrowers will default on their loans which will increase mortgage foreclosures. This is huge when you consider that not only is the real estate market important to the stability of our economy, but also that consumer spending is a large percentage of the Canadian economy. Further, economic recoveries are generally led by consumer spending. One of the economic indicators being watched closely in the US right now is consumer spending which is increasing.

What will this mean to the Kootenay Boundary Market? Probably not much. However, what this does do is tighten up credit and drive those consumers to other higher interest credit. Those that are prone to getting into trouble will do so quicker. Credit cards, unsecured lines of credits are not hard to get yet the interest rates are much higher and defaults much higher than mortgage defaults.

here seems to be many other options the government could change that would still stimulate that economy, keep the real estate market strong and help Canadians. A simple thing like reducing the higher interest rates charged on student loans, credit cards, unsecured lines of credit etc. Make it more difficult to get a credit card and increase due diligence to the providers of these cards. And finally, action to the government discussion in 2010 of stabilizing mortgage prepayment penalties. Lastly, my bet is that we will experience not only a few snow flurries before the changes come into effect but also a flurry of real estate purchases. There is not a lot of listing inventory right now, so it may be a good time to sell.

Posted by Gina Ironmonger on January 25th, 2011 6:12 PMPost a Comment (0)

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