The federal government has, for the second time in months, again tightened the lending requirements for insured mortgages by reducing the amortization period from 35 to 30 years, reducing the limit for refinancing to 85% and dropping the ability to insure secured lines of credit (effectively reducing the limit on these to 80% of the value of the home). Reducing the amortization period from 35 years to 30 years has the greatest impact on new home purchasers in the most expensive cities (Vancouver, Toronto, Calgary). Allowing for a longer amortization period reduces the monthly payment and allows first time buyers to stretch their budget. Young households, whose income is typically increasing more rapidly than the average income, can enter the market and start to make prepayments which reduces the amortization to a more reasonable level. In the past, mortgage insurers have accounted for the increased risk associated with these loans by increasing the fee.
The ratio of mortgage payments to disposable income is below what it was in 1988-1990 and as of 2009 was at the past 10 year average level. Mortgage arrears increased slightly in 2009 to .4% but are still well below historical levels and far below the current and historical levels in the U.S. (CMHC Canadian Housing Observer 2010). There is no particular boom going on in the housing market at the moment; house sales were down 3.9% in Canada in 2010; prices were up slightly but mainly as a recovery from the drop in 2009 (CREA News Release, Jan 14 2011) It is unclear why these changes were considered necessary at this time.
If there is concern about borrowers overextending when borrowing against a home, there are other mechanisms to deal with this. Lenders can require higher credit scores (and do) on loans that are perceived to be riskier. Consideration could also be given to limiting 35 year amortizations to first time buyers to assist them into the ownership market. The most recent changes seem to have been made without rationale to support them. A more careful analysis of consumer borrowing overall, how much of mortgage debt is being used to pay off other consumer debt, whether borrowers are paying off lines of credit over time or allowing them to grow might produce more effective restrictions on irresponsible consumer borrowing, with less impact on the housing martket.
Jane Londerville is an Associate Professor and Interim Chair of the Department of Marketing and Consumer Studies at the University of Guelph. She also authored the recent MLI publication, Mortgage Insurance in Canada.
