The Ontario Superintendent of Financial Institutions is considering more changes to the mortgage rules, according to the Financial Post.
What could this mean? Well, “low ratio” mortgages would only be given with 25-year amortization periods, as opposed to 35 years. Low-ratio mortgages are loans for no more than 80% of the home’s value, and do not require insurance, although mortgage providers may sell them with insurance. Because until this point they were considered more secure, granting them a long amortization period made sense. But following the 2008 mortgage crisis in the States and elsewhere, some economists think the conventional wisdom around mortgages is due for re-evaluation.
Finance minister Jim Flaherty has gone on the record stating that he wants Canada’s housing market to cool down, and for the past four years the government has narrowed the window on available mortgages by changing the mortgage rules. The primary goal in narrowing that window is to keep more Canadians out of debt they can’t manage, which has been a troubling trend for Canadian households with a high debt-to-income ratio.
So what does this mean for home buyers? First, it means they should speak with the financial planner at their mortgage-lending institution before applying for a mortgage. (This is always a good idea, but it’s an even better idea when the rules are in the process of changing.) Second, it means that more potential homebuyers may be shut out of the market, as is happening in Toronto’s condo market, and in the semi- and detached market, which is dominated by high prices and low sales.
There is an argument to be made in favour of limiting the availability of mortgages. Buying a home with dreams bigger than your wallet can turn into a nightmare of debt. Paying less than 20% of a home’s price as a down payment is a way to get onto the housing ladder, but can cause problems down the road if interest rates go up or if your financial situation changes – and it means you’re paying PMI, which is more than an extra percent on your mortgage rate. And amortizing over a long period means that the debt only lasts longer, compiling further interest and limiting the likelihood of obtaining other loans that play a major role in developing personal earning potential, such as business and education loans. It can be tough to start that new venture, or invest in another degree, when you’re still responsible for a thirty-five year mortgage. And you’ll probably end up paying hundreds of thousands of dollars more on the same loan than would someone with a shorter mortgage term.
On the other hand, shutting more and more people out of the housing market does nothing to ameliorate the factors that keep homebuyers from affording bigger down payments and bigger mortgages. Younger Canadians have a harder time obtaining mortgages than Boomers did, because tuition increases have saddled them with greater student debt. Locking them out of the housing market means diminishing the tax base necessary for municipal initiatives and infrastructure, and encourages them to take themselves and their talent to other provinces. Moreover, homeownership has a beneficial impact on academic performance and behaviour in young children. And yet, more and more Millennials are facing the prospect of starting their families in apartment complexes, if they decide to have families at all. In other words, limiting the availability of mortgages might diminish the average ratio of Canadian household debt, but it’s only a blunt tool for re-building the Canadian economy as a whole.