Having had its main economic control tool, interest rates, hijacked by world events, the federal government has decided to cool the housing market, and limit household debt by simulating a rate increase with another round of rule changes for high-ratio mortgage borrowing. This is the 4th time in 4 years the government has waded into the market to tweak mortgage rules to reduce the debt appetite of Canadians. “Previous rule changes had some effect in countering the stimulus provided by historically low interest rates but failed to stop Canadian household leverage from increasing,” Moody’s analysts William Burn and Andriy Stepanyants said in a recent report.
Of the four key changes set to take effect on July 9th, the biggest impact is expected to come from the return to a maximum amortization of 25 years, down from 30. This will boost monthly payments and is seen as equivalent to adding approximately one percent to interest rates. This will cause some buyers to reduce or delay their purchase plans, and that’s the soft landing Ottawa is looking to achieve.
Two other changes appear to directly target what the government believes are excessive household debt loads. The Loan to Value ratio for refinancing is being cut to 80% from 85%, and the maximum GDS and TDS will be fixed at 39% and 44% respectively.
The other change that’s getting a lot of attention is the end of insurance for high ratio mortgages over $1 million. This is likely more politics than prudence. CMHC’s figures show only about 5% of its insured mortgages are for more than $550,000.
If rates are going to stay low for a while, the government is taking the view that they need to ensure we have more equity in our homes and reduced household debt levels so that we will have some flexibility to adapt to shifting markets.
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Lee Welbanks is a Mortgage Broker with Welbanks Financial Group, Lee will be posting these informative “Market Minutes” each week for you to enjoy. Please remember to the Spring Realty Insider Club list to receive new blog post notifications, featured properties and insider access to Toronto’s hottest new developments right to your inbox. Find us on Facebook and Twitter too!