Changes to CMHC Mortgage Policies

By Craig Wong, The Canadian Press

OTTAWA - Ottawa is tightening the rules for government-guaranteed mortgages that will limit the maximum amortization period to 35 years and require a minimum down payment in a bid to prevent a meltdown like the one in the U.S. subprime mortgage market.

The Finance Department said Wednesday it will no longer guarantee 40-year mortgages and will require a minimum down payment of five per cent of the value of a home.

Government-backed insurance is currently available on mortgages where the loan-to-value ratio is up to 100 per cent - in other words the buyer has borrowed all the money to buy a home and then gets insurance coverage on the whole amount.

The changes announced Wednesday will cut this ratio to 95 per cent. Borrowers may still borrow the five per cent down payment, but it will not be insured under the new scheme.

Finance spokesman Jack Aubry said the moves will strengthen the Canadian housing market and reduce the risk of a housing bubble.

"Limiting the use of 40-year mortgages and requiring a minimum downpayment will help ensure that people build real equity in their home faster," Aubry said.

The new limits, which are set to take effect Oct. 15, will affect only new government-backed insured mortgages.

Canadians who already hold mortgages won't be affected by the changes.

In April, Bank of Canada governor Mark Carney raised his concerns about the loosening standards in the Canadian mortgage system, particularly the growing popularity of mortgages amortized over a 40-year period.

In other words, mortgages that are designed to take 40 years to fully repay if the borrower sticks to the regular schedule of instalment payments.

Carney told a Commons committee that the central bank was watching developments in the mortgage lending sector closely to ensure that the abuses seen in the U.S. subprime market do not occur in Canada.

In the United States, imprudent lending by banks and financial companies to high-risk borrowers at low rates created a housing bubble that eventually exploded when mortgages renewed at higher rates and borrowers couldn't pay and defaulted.

In Canada, defaults of bank-originated mortgages are extremely low - well below one per cent of the total, according to figures compiled by the Canadian Bankers Association.

The collapse in the U.S. housing market led to broader troubles in the U.S. economy, reducing demand for Canadian exports such as lumber and autos. It also led to a corporate and consumer credit crunch that is still being felt by ordinary Americans and companies.

In Canada, the government said Canadian banks and other lenders have not written many government-backed mortgages to borrowers with low credit scores, but to ensure this continues the changes will establish a credit score floor of 620.

Economists have noted a cooling in the Canadian housing in recent months after several years of strong growth. Higher loan-to-value ratios and longer amortization periods are believed to have prolonged the cycle by opening the market wider.

Scotiabank senior economist Adrienne Warren called it a "modest tightening in credit conditions" could exclude a few people at the margins from buying a house.

"We were already in a process of where we're seeing things cool off and I think this will just reinforce that," she said.

Warren added that most Canadian lenders have been more conservative than their counterparts in the United States.

"It's essentially a sort of cautious move and reaction to the difficulties we're seeing in the global housing market and particularly in the U.S.," she said.

Jason Scott, a mortgage associate with Urban Mortgage in Edmonton, said the changes will make it more difficult for younger buyers who are looking to get into the market.

"Reducing the maximum amortization is going to put people who are at the fringes of affordability out, 40-year amortization has been very popular with younger people who are purchasing their first home," he said.

The changes Wednesday also set a maximum of 45 per cent for the proportion of gross income that is spent on debt servicing and housing-related fixed or essential payments.

And mortgages that begin with "interest-only" payments and home equity lines of credit will also not be covered by the government guarantees.

Ottawa noted that reducing amortization from 40 years to 35 years on a $200,000 mortgage with a six per cent interest rate would increase the borrower's monthly payment by $41. The borrower would also save $49,000 in interest payments.

Canada Mortgage and Housing Corp., a Crown corporation, is the country's largest insurer of home mortgages. The government also backs private mortgage insurers through guarantee agreements that protect lenders in the event of default by the insurer.