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Mortgage Rule Changes Positive for Canadian Banks…What about the Edmonton housing market?

First off I'd like to apologize for missing the discussion on the mortgage changes last week. Sheldon and I were enjoying a much needed winter break on a Caribbean Cruise and our internet access was difficult to say the least. Many people felt we were trying to hide something, but we simply weren't able to comment. 

Amortization Changes:

The recent changes to mortgage rules were designed to curb household debt in Canada. Last April we saw the maximum allowed amortization in Canada drop from 40 years, to 35 years, and this March we will see a further drop to 30 years. To us this appears to be part of a long term plan, and perhaps we will even see another drop to 25 years next year (putting us back to what was the norm for as long as I can remember). A gradual decline is certainly preferable to a massive change, and providing a few months notice also "lessens the blow."

So what does the amortization change mean to the average home buyer cost-wise? The monthly payment on a 30-year amortization is $34.72 higher for every $100,000 of mortgage than a 35-year amortization (assuming 4% interest rate). That's not a really a big deal as far as I'm concerned, the big deal is the impact it will have on approvals - many buyers are qualified at the maximum amortization, so buyers will not be approved for as much after March 18.

Over at the First Foundation Mortgage Blog, they clarified that current homeowners with 35 year mortgages may be concerned about what will happen upon renewal; typically, as long as you are not changing your loan amount at renewal, you should be able to continue with your original amortization schedule. However, you should confirm this with your individual lender or mortgage broker. If you need to increase your mortgage via a refinance at renewal, you will be subject to the limitations of the new rules.

Lower Refinancing Amount

Currently borrowers can refinance their mortgage and increase the amount of the loan secured against their home up to 90% of the value of the home. The new rules will reduce the limit on refinancing 85% of the value of the home. This change is directly intended to deter home owners from using their home as a "bank machine" and encourage Canadians to pay down their mortgages spending less money on interest charges. 

A research note today by Peter Nerby, senior vice president at Moody’s Investor Service, says that “changes to the government’s mortgage guarantee insurance program that are intended to curb consumer mortgage indebtedness and cool the housing market ... are credit positive for Canada’s banking system and their bondholders.”

No more Government Backed Insurance on HELOCs and the like

The government does not want to encourage Canadians to have large HELOCs and other other "non-amortizing lines of credit secured by homes" for a few reasons:

• These loans are currently limited to 80% of the value of your home, there has been a substantial increase in the value of homes in the past few years, which means a substantial increase in the credit available to home owners. This is a big part of the rise in overall household debt in Canada.
• Generally borrowers are not required to make regular payments on the principle amount of the loan, and these loans are generally variable rate products which exposes borrowers to rising interest rates.

These changes are geared towards limiting tax payer risks (as we are the ones in the end insuring these loans) and decreasing the household debt in Canada and only affect new loans (if you have an existing insured HELOC it will remain insured until it is discharged). 

How will all of this affect the Edmonton real estate market?

On first glance it would be easy to assume that these changes will push buyers forward and create an earlier peak in the housing market just like we saw last year. However, the changes last year had more of an affect on first time home buyers and their ability to get a mortgage; last year not only was the amortization shortened, but the rules for get approved were changed (you have to qualify at the 5-year fixed rate even if you're taking a shorter term and/or variable rate). These changes had a noticeable impact on the housing market in Edmonton (and Canada) and we saw sales drop off right after the rules came into place. 

This year the changes will have less of an impact on buyers entering the market, and more of an impact on existing home owners looking for re-financing and lines of credit. I don't believe these changes will create a significant impetus for buyers move their purchase forward. We think there are other, bigger influences at play in Edmonton such as migration into the province, job creation and rising mortgage rates that will affect the housing market later in the year.

In a previously published post, we had quoted Chris Mooney, President of the REALTORS® Association of Edmonton about "external influences" and many people wondered "what constitutes an external influence?" I would suggest this qualifies as an external influence. As always, time will tell just what impact (if any) this has on the market.