That’s right, the blog post title is not a typo. Jim Flaherty is once again trying to cool our housing market and although this change might not make a huge impact now, it does have some implications for the future. It sometimes feels like Jim Flaherty is the bully and our housing market is the victim. I think this change was more of a long term strategy for Jim Flaherty and we haven’t realized it’s affects yet. So what is this change I speak of? Read on!
CMHC (Canada Mortgage and Housing Corporation) is a government owned mortgage insurer. Banks insure their mortgage loans when a borrower has less then 20% down (high ratio mortgage) and even mortgages with more then 20% down (conventional mortgages). If a borrower defaults on their mortgage payments consistently, the bank is protected and is ensured they will receive their money back for the mortgage loan they have given out. As of immediately Jim Flaherty has capped the amount of CMHC insured mortgages to $350 million per month for lenders.
Why The Change
CMHC was going to insure $85 billion worth of new mortgage loans this year. Halfway through the year, CMHC was already at $66 billion (77%). I guess Jim Flaherty thought we were buying up properties too fast and taking on too much mortgage debt that we can’t afford, especially if rates go up, that he decided to put a monthly cap on this amount to slow down the housing market. And of course in the case of a widespread mortgage default scenario, he wants to make sure CMHC is also protected.
As of now there is no dramatic or direct impact and it’s business as usual. But since lenders have this new cap in place, they will be really careful who they give out mortgages too on a monthly basis as they can only give so much. $350 million per month may seem like a lot of money, but when taking into consideration the price of housing, it can add up pretty quickly. The cost of borrowing may also go up for the borrower so that banks can compensate for the limited number of people they can give out loans to each month. With all the new rules catching up, getting a mortgage loan is not easy and requires sufficient time to get the job done. Remember just because you may have 20% down or more, doesn’t mean you won’t be affected.
Believe it or not, you do have options. Although CMHC is the main mortgage insurer that we all hear about, there are 2 others in the market place that are not government owned, Genworth and Canada Guaranty and therefore are not subject to the monthly cap (but it could happen in the future). Don’t worry if you’ve never heard of them before as most lenders do also use Genworth. I can definitely smell a golden opportunity for Genworth here.
I wanted to get a second opinion on all of this so here’s what Mortgage Jake’s had to say:
“The more things change the more they will stay the same as long as rates hold steady. Even at 4% we are in historical lows and a great long-term borrowing option. The most serious change will be elimination of 5% down payment options, which is something that has long been a rumour but I don’t believe (nor do I hope), will happen. There is too much negative press surrounding our housing market, which flies contrary to the actual data which shows things are slow & steady in Toronto. From a borrowing and financing perspective I think people should continue to buy the houses they feel they can afford, do a “stress-test” on their finances, be prepared with a 6-month contingency fund, and buy SMART”
My advice to all buyers is make sure to speak with a mortgage specialist before beginning your home search. Also I know I’ll probably get a lot of hate mail for saying this, but if you can always have 20% down payment when purchasing a home for many reasons that I will explore in a future blog post. Find out all your options and how much you can REALLY afford. Make sure to have all your paperwork ready so that when you do find your dream home, you can jump on the opportunity and lastly leave yourself plenty of time, to get a FIRM approval from your lender and the insurer!
Oh and Jim Flaherty, back off, leave our healthy housing market alone. You have been proactive enough, let’s not have your changes have a reverse affect on real estate.
Have a question for Jake and I? Make sure to send it over and we will do our best to answer them.