Canada is quite different than the US and a major reason why is because of the Federal Governments oversight of our banking system. In Canada, if banks want to be able to lend more than 75% of a property’s value they must obtain high ratio mortgage insurance from the Canadian Mortgage and Housing Corporation (CMHC). When a mortgage is insured by CMHC, both CMHC and the bank will have to approve your mortgage application. CMHC has legislated guidelines that banks must follow in order to obtain high ratio mortgage financing.
Last year Minister Flaherty tightened up CMHC guidelines and Canadians can no longer amortize CMHC insured mortgages longer than 30 years. In addition, they reduced the percentage to which you can refinance your home and no longer will high ratio insure home equity lines of credit.
This week in Ontario’s mortgage news, TD bank released a report asking the government to increase the minimum down payment required to purchase a home from 5% up to 7%.
Minister Flaherty met with economists in early March and received advice that he should clamp down on Canadian’s appetite for housing and new debt. TD Bank’s chief economist Craig Alexander suggests that the Minister reduce the maximum amortization on mortgages to 25 years from 30, or increase the minimum down payment that Canadians are required to make when purchasing a home from 5% to 7%, or mandate a “means test” for those seeking loans by ensuring they can afford to make payments as if mortgage interest charges rise to 5.5 percent, about twice as high as many current rates.
Debt has continued to rise in Canada and especially in Ontario faster than incomes; the average debt service ratio in Canadian households exceeds 150%. With the latest figures released indicating that household debt accumulation is still rising at six percent annually and the fact that The Bank of Canada has asserted that household debt is the “biggest domestic risk” to Canadians; one or more of these options may be considered by CMHC.
With that said, Minister Flaherty has expressed fears that discouraging home buying could cause a loss of construction jobs, a sector the economy was hit very hard with in Ontario during the last recession and was covered extensively in Ontario mortgage news. Disruption to other parts of the economy has also been a major reason that The Bank of Canada has held back on raising interest rates.
What does this mean to you? Well, if you are someone who has aspirations of owning a home and only has a 5% down payment or cannot afford a large mortgage payment, the time is now to act to ensure that you can secure your mortgage financing before more changes come down the pipeline. Increased pressure from economists may result in Minister Flaherty taking recommendations in the coming months that could seriously impact your ability to buy a home and qualify for mortgage financing. One thing that is important is that you pay attention to Ontario mortgage news and keep on top of announcements so that you don’t find out that something major has changed after it’s too late.