Tuesday, February 16, 2010

New Mortgage Rules

As I mentioned last week, the start of the Olympic Games would make it difficult for me to post on a daily basis and that's exactly what has happened. I have lots more Olympic pics for you, but I may stick them on a subsite and reference the link here.

The main news today is the new mortgage rules that the Canadian Finance Minister came out with.

In a nutshell (1) all borrowers must meet 5 year fixed rate standards instead of the previous standard of 3 years, (2) limit refinancing to 90% vs 95% of a home's value, and (3) require 20% down for speculative/investment mortgages that require CMHC insurance.

Comically Finance Minister Jim Flaherty said he is responding to growing concerns that Canada's housing market is overheating, but stresses there is no bubble in Canada's real-estate market.

"There's no compelling evidence of a housing bubble, but we're taking proactive, prudent, measured and cautious steps today to help prevent a housing bubble."


We have a housing bubble and the government is scrambling to find ways to tamper the fire without putting it out.

As for discouraging speculation by demanding that prospective homebuyers who want to purchase a property for rental purposes will have to come up with a 20% downpayment, instead of the current 5%, Economists are already noting that it will be difficult for lenders to determine on which side of the line buyers fall.

And the creation of a test threshould of meeting a 5 year fixed mortgage rate? All this change does is limit the size of the mortgage you are going to be able to get; it doesn't prevent people from buying homes, it doesn't drive a lot of new homebuyers out of the market and it doesn't lead to higher payments.

Currently you can get a 5 year fixed mortgage for 3.75%. What kind of test threshold is that?

The infamous stress tests conducted by the Bank of Canada released at the end of the year tested current Canadian mortgages at a 4.5% rate threshold and found that 10% of all Canadians would be severely stressed at this level.

It all comes down to interest rates.

And on that front events are moving very quickly with the PIIGS, Dubai and the global demand for money. More on that tomorrow.

I steadfastly maintain that events will push intrerest rates levels to the historic norm of 8.25% AT THE VERY LEAST!.

That rate is almost double the BOC stress test rate that places 10% of Canadians in 'severe distress'. Recall that one morgage broker considers 8% to be a 'doomsday scenario'.

These are the same brokers, btw, who rationalized that anyone who receives a 5% down/35 year amortization mortgage "are getting them because they’re well qualified. It’s that simple."

Well... no it's not. And the fact that the Finance Minister's hand was forced into taking some sort of action proves that they are not well qualified.

But let's not kid ourselves. The new mortgage rules do nothing to address the dangerous and precarious position that a vast majority of current Canadian mortgage holders are already in.

When the global demand for capital pushes yields ever higher, the 'Canadian-housing-bubble-that-isn't' will trap all these Canadians and implode in spectacular fashion.

It's all about interest rates, and not the 5 year rates at a piddling 3.75% or 4.5%.

Interestingly, Minister Flaherty took a small jab at lenders in his release today, saying these rule changes are designed to “help prevent some lenders” from “facilitating” irresponsible lending.

Nice of you to finally admit that this exact problem already exits, Jimbo. The problem is... irresponsible lending has already created a collossal mess. And there is only one way that mess will be unwound.


Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.


  1. What a pathetic response, but not unexpected from Flaherty. We really need to increase the minimum down payment to 10 or 15%, as this would bring things down to earth. The government must really be afraid what would happen to the economy if not for this housing bubble.

  2. Flaherty's response (or lack of) to the housing bubble is too little to late. The minimum down payment should be at least 10% and amortizations of 25 years or less, and still include the three items he proposed as a minimum.

    Excellent post!

  3. If you can't carry it at 10% then you can't afford it. Anyone taking out a 30 year load you should look at the previous 30 years like a mirror. In the best case scenario we'll that same show played out in reverse.

  4. Holy crap I can't even write three sentences. I blame the CMHC. Good night everybody.

  5. Talk about closing the barn door after the livestock has left.
    I wonder what percentge of people just got kicked out of the housing market with this move.
    Add to this the HST that's coming. Get used to it folks, there's going to be less people to buy your house in the future.

  6. I suspect various lending institutions will find ways for borrowers to circumvent some of these new rules with ease. Proof of income under the old rules was a farce for some first time buyers I know. Expect more of the same.