Buses pass by a house listed for sale in Toronto’s west end on July 4.Sammy Kogan/The Globe and Mail
Ottawa is calling them the “boldest mortgage reforms in decades.” And while the new mortgage rules are a boon for aspiring first-time buyers, there are many questions that remain unanswered for both these borrowers and the mortgage industry.
Let’s start with the recently unveiled policies, which go into effect Dec. 15. They will allow first-time homebuyers to extend their mortgage amortization to 30 years from the current 25, even if they have an insured mortgage. Insured mortgages are mandatory when buyers have downpayments of less than a 20 per cent.
In addition, these buyers will now be able to get an insured mortgage for a home priced up to $1.5-million, up from a limit of $1-million. According to the Department of Finance, the new policies will apply to 19 per cent of the total mortgage market.
All of this provides first-time buyers – who’ve been battered by a combination of high housing prices and steep borrowing costs – some much needed relief. They’ll now be able to purchase a pricier home without having to cobble together a 20 per cent down payment. That will open up other home types to this group, whose options are usually limited to condos, especially in Canada’s most expensive real estate markets.
The ability to remain an insured borrower at this price point will also give these borrowers access to the best market interest rates – lenders usually offer their lowest mortgage rates to insured borrowers, since their risk is backed by the mortgage insurance they are forced to get. And the longer amortizations will help lower monthly payments, which improves cash flow.
It’s great news for those who are eligible – and for the mortgage and real estate industry, which have been calling for changes like this for some time. But as is often the case when policies shift, the the announcement leaves some questions unanswered. Here’s what the government still needs to clarify.
What about applications “mid-flight”?
The new rules are slated to kick in on Dec. 15 – but what about borrowers with new mortgage deals already under way? For example, let’s say a buyer has signed a purchase agreement and the deal closes after the date the new rules are implemented. Will this deal be eligible for a 30-year amortization if all other criteria are met? Or is it only mortgage deals that originate on or following the 15th that will qualify?
What about uninsured first-timers coming up for renewal?
Let’s say a first-time buyer purchased a home valued at over $1-million, and currently has an uninsured mortgage. Assuming their property’s value hasn’t yet topped $1.5-million, could this borrower be eligible for an insurable mortgage when they come up for renewal?
An insurable mortgage differs from one which requires insurance in that more than 20 per cent has been paid, but the price and amortization still fall within the insured guidelines. In these cases, borrowers can choose to have an insurable mortgage, the main benefit of which is that it gives them access to the most competitive, insured mortgage rates.
Under the new rules, such a borrower would still satisfy the criteria of owning their first home, with a price under the maximum insurable cap; could they choose to make their mortgage insurable and access better rates at that time? Will the policy apply to insurable mortgages at all, or is it just for transactionally-insured mortgages?
Will mortgage insurers increase their premiums?
Canada’s mortgage insurers – Canada Mortgage and Housing Corp., Sagen, and Canada Guaranty – have increased their premiums in the past for the new products that emerge when insured qualification rules change. The most recent example is from June, when the government announced they were extending amortizations for insured first-time buyers purchasing new construction. The insurers responded by increasing their premiums by 20 basis points for borrowers using this option. (A basis point is 1/100th of a percentage point.) It remains to be seen how much – or when – such an increase will be this time around. But the answer here is yes, this is most likely coming.
Could regulators toughen up the mortgage stress test?
A main concern about these policies is the increased risk they pose to Canada’s mortgage market. They’ll create a larger pool of borrowers who have less equity in their mortgage but are carrying larger loans, and who will pay more on their mortgages in the long run. While these borrowers will be stress tested, proving they have the income required to carry their payments even if interest rates increase by two percentage points, it still puts them – and the lenders who have them on their books – in a more precarious position.
This could prompt Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, or OSFI, to increase the current stress threshold if they feel banks are taking on too many high-risk borrowers. That would have the effect of unwinding the benefits of these new policies.
Penelope Graham is the director of content at Ratehub.ca.
