Mortgage Financing Rules Won't Cool Van Markets

Do changes to the Mortgage Financing Rules really spell doom and gloom for the market? Not likely!

Last week the federal government announced some big changes coming in October 2008. I think these changes could have the most significant impact in Vancouver, given that it is likely the least affordable city in the country. However, having seen the cover story in the Vancouver Sun on the topic, I think it is a bit blown out of proportion. First, I will review the changes and then discuss what the impacts might be.

Bottom line regarding the changes: if you need a 40 year amortization period, or are buying with zero down payment, make sure you have completed your purchase by mid-October when the changes come in.

In a nutshell, as of October 2008, 40 year mortgages and zero down payments will be a thing of the past. Obviously, this will lower the purchase price that some can afford and for others, it could potentially keep them out of the market entirely,but I think the latter situation will be rare.

These changes do not come into affect until October so there is still time for buyers to either buy under the current rules or to plan for a larger down payment or to live on less money every month so that they can afford their mortgage payments. It is not clear, based on the information I have been able to obtain, whether these changes will only apply to mortgages which are insured, or to all mortgages.
Still waiting for an answer on that.

Those whose mortgages are currently amortized over 40 years will be able to continue to have their mortgage payments calculated over a 40 year period until they come up for renewal. Then, if for example the mortgage had a 5 year term, upon renewal at the end of the 5 years, the amortization would be reduced to 35 years.

This is not a change to the current policy. So this should not affect one’s ability to make mortgage payments, Since I am one of those 40-year amortizers, I am happy with that.

Before we get to the government news release, I have to say that, the Vancouver Sun’s coverage last week of the change is a bit over the top. I know they are trying to sell newspapers but really! I’m trying to find the stat on the percentage of buyers who actually use 40 year amortizations and zero down payments and, from my experience, I don’t think that number is very high.

Plus, the 35 year amortization option will still be available and of those who choose 40 year amortizations, it is likely that most could afford the 35 year payments and still qualify for their purchase.

So although the Vancouver Sun said the change could really cool the real estate market, hmm, I don’t think so. Not on its own.

Here is the federal government news release on the changes:

“The Government of Canada today announced adjustments to the rules for government guaranteed mortgages aimed at protecting and strengthening the Canadian housing market. The new measures include:

* Fixing the maximum amortization period for new government-backed mortgages to 35 years;
* Requiring a minimum down payment of five per cent for new government-backed mortgages;
* Establishing a consistent minimum credit score requirement;
* and Introducing new loan documentation standards.”

The announcement marks a responsible and measured approach by the Government to ensure Canada's housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada.

The new limits are planned to take effect October 15, 2008. This would 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 by this announcement.

The measures announced today 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 home ownership is at record levels, 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.

Patricia Houlihan is a third generation realtor, born and raised in Vancouver. She has been monitoring and analyzing the real estate market in the Lower Mainland for most of her life. She has an environmental law degree and a Bachelor of Arts degree and she has practiced law for over fifteen years. She will be writing a regular real estate column for the Vancouver Observer. This is the first of her columns.

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