As of Oct. 15, the federal government is making big changes to mortgage rules in an effort to protect and strengthen the Canadian economy and try to prevent the housing bubble from bursting as it has south of the border.
In early July, the federal government cracked down on mortgage rules by announcing it will no longer guarantee 40-year mortgages. The longest amortization available has been reduced to 35 years. The government is also eliminating the no-money-down mortgage concept by implementing a requirement that homebuyers must have a minimum down payment of at least five per cent of the value of a home.
When the federal finance department made the announcement this summer, most of the major banks jumped on the bandwagon and have already discontinued offering those products. Although there are still some lenders offering zero down and 40-year amortizations, that will come to an end on Oct. 15, when the new mortgage rules officially take effect.
The new limits will only affect new, government-backed mortgages and Canadians who already have a mortgage won't be affected. Still, many mortgage experts are predicting this will have a significant impact on the housing market.
"It's going to hinder a lot of people from getting into the market for a year or two," says Wayne McConnell of A+ Financial, who has been in the mortgage brokerage business for the last 15 years.
With the rising price of houses in Winnipeg and elsewhere across the country, McConnell says many people took advantage of no-down-payment mortgage. He says a lot of young professionals who were just starting out with student loans and other first-time buyers were able to buy a home with that option.
"The only way they got into the market was zero per cent down," he notes. "If they had to put five per cent down, that would leave them out of the market for at least another year."
That's exactly what new buyers will have to do as of Oct. 15 -- put at least five per cent down in order to qualify for a government-backed mortgage. On a $230,000 house, that means they would have to come up with at least $11,500 as a down payment.
While eliminating the zero per cent down payment and decreasing the maximum amortization to 35 years are going to have an impact on the market, McConnell says there is another change that will hit people even harder.
That change is all about credit ratings. The government has established a credit score floor of 620. That means, as of Oct. 15, potential homebuyers will have to have a beacon score of at least 620. That's considered to be good credit, McConnell notes.
And that's what can impact people the most, McConnell notes, as there are many factors that can lead to a lower beacon score or credit rating. If you have paid any account over 30 days late or you are near or over your credit limit, that can bring down your beacon score. The number of inquiries or credit checks you've had in a given time period can also reduce your rating.
"This will impact a ton of people," says McConnell. "This could disqualify 10 to 15 per cent of buyers -- that's substantial."
So why is the Canadian government doing this? It's heeding the warning signs coming from down south. In the U.S., overzealous lenders such as banks and financial companies lent money to high-risk borrowers at low rates and created a housing bubble that eventually burst. The bubble burst when those same borrowers renewed their mortgages at higher interest rates and couldn't afford to repay them.
According to figures compiled by the Canadian Bankers Association, defaults of bank mortgages here in Canada are well below one per cent -- very low compared to the U.S. The American rate of mortgage default is now at about nine per cent and climbing. While Canadian lenders are more conservative than their U.S. counterparts, the federal government is being cautious by making changes our mortgage requirements.
"All of this is a true reflection of what is going on down south," says McConnell.
Yet at a major mortgage broker convention in Edmonton last week, he says the buzz was that the Canadian government has overreacted a bit by imposing the changes.
"Maybe tighten the 40-year amortization and zero per cent down," McConnell concedes. "But the beacon score of 620 is just going to stifle our economy."
Regardless of public opinion on policy, the mortgage changes are looming as the deadline fast approaches. Buyers not only have to buy a house before that date, they must take possession by Oct. 15 in order to avoid being affected by the changes.
"A lot of our clients are pre-approved, but the clock is ticking," McConnell notes. "A lot of people are frantically out there looking to get into the market before Oct. 15."
tbryksa@mts.net
