Flaherty’s Recent Mortgage Comments…in Context

THINKOUTSIDETHEBOX:  Interest Rates are increasing immediately and we suspect extended amortizations are coming down shortly.  This means higher monthly carrying costs for your clients and significantly less mortgage financing they will qualify for.  If you  have clients waiting to purchase a property, there is probably no better time than right now to lock-in a rate and start shopping.  Here are some numbers to show how a change in amortization can affect a monthly payment and the income necessary to qualify for the same amount of mortgage:

Amortization                                    25 years               35 years

Average Mortgage                          $300,000             $300,000

Today’s 5 year fixed Rate              2.89%                   2.89%

Monthly Payment                            $1403                   $1133

Income Required to Qualify          $53,938               $45,642

The difference in Income required to qualify for the same mortgage immediately following a decision to amend the maximum amortization rate in Canada will be over $8000 per year, the equivalent of an 18% increase in income.  Here is an excerpt from questions asked of the Canadian Finance Minister, Jim Flaherty, which I believe hints at changes in regulations that will decrease the maximum amortization period available for any property owner in Canada.  Here’s the article:

On May 14, Finance Minister Jim Flaherty was questioned by Julian Beltrame of Canadian Press (CP) about the need for additional mortgage restrictions. Flaherty replied:

“I’m not going to intervene in the mortgage market, I don’t need to.”

When that quote hit the wires, the mortgage industry breathed a collective sigh of relief. Just days before, news had broken that OSFI was considering new limits on amortizations for those with 20%+ down.

But we have since obtained a transcript of that May 14 CP interview, and there is more to Flaherty’s comments.

“Basically, [Minister Flaherty] was referring to insured mortgages,” said Department of Finance spokesperson Stéphanie Rubec.

As such, it appears that new restrictions on uninsured (conventional) mortgages are not off the table. And, what those might be are anyone’s guess. There’s been speculation that:

maximum conventional mortgage amortizations might be cut to 25 years, or conventional amortizations may be left at 35 years but borrowers may have to qualify at (i.e., prove they can afford) a 25-year amortization

5-year fixed borrowers may have to start qualifying at a higher rate, like posted rate (currently they can be qualified at the actual—i.e., “contract”—rate.

There is no indication that any of these things will happen, or are imminent. But we know for certain that some policy-makers in Ottawa still aren’t confident that housing/mortgage risk is contained.

Flaherty told CP’s Beltrame, “…I’m satisfied by where we are in terms of insured mortgages, but the Superintendent of Financial Institutions has (the) independent responsibility to watch the financial institutions to make sure that they’re not taking on too much risk.”

“…OSFI’s concern is that some banks may be taking on too much exposure. This has nothing to do with insured mortgages.”

“…What I think the superintendent is looking at is their entire portfolio and what’s insured and what isn’t insured.”

Flaherty added, “I’m also pleased to see some other moderation in new house construction, and in the demand for mortgages. I think these are healthy developments, because we were beginning to see some indications of the beginning of a bubble.”

Despite the above, Kathleen Perchaluk, Press Secretary for the Office of the Minister of Finance, tells us, “…No announcements from the Department of Finance related to uninsured mortgages are planned.”

On May 11, OSFI stated, “We are…doing some preliminary consultation with financial institutions. We are working to determine the desirability of some (mortgage) changes given current conditions in housing markets and recent trends in household indebtedness.”

As reported here previously, OSFI says that further uninsured mortgage changes would be subject to a public comment period. That would take some degree of time. But Flaherty was clear: “…If the superintendent (of OSFI) has some concern about the banks’ books…she’ll take the necessary action.”

Rob McLister, CMT

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