January 17, 2012:
The Canadian government announced changes to the rules for government backed insured mortgages or “CMHC” insured mortgages. The three changes are designed to slow the pace at which Canadians are borrowing money, specifically, to refinance their homes. These changes are in addition to the changes adopted earlier this year which introduced a prescribed “qualifying rate” that was 3% higher than the market rate. For example, while mortgage payments reflect an interest rate of 3%, the bank would qualify borrowers based on a 6% interest rate to ensure that they could afford the new mortgage whether they were buying a home, renewing their mortgage or refinancing their property.
The new changes include:
- Reducing the maximum amortization from 35 years to 30 years for CMHC insured mortgages. Such an amortization would increase monthly costs thereby reducing the amount of money some Canadian’s can borrow.
- Reducing the maximum refinance from 90% to 85%, effectively forcing Canadian’s to save and keep equity in their home and lastly
- Withdraw government insurance for home equity lines of credit (HELOC’S).
The government is making these changes to ensure continued stability in Canada’s housing market and avoid a US style housing meltdown. Household debt is on everyone’s radar screen. Canada’s Finance Minister, the Hon. Jim Flaherty was clear in his viewpoint that Canadians are traditionally good savers, but removing some of these pro-lending policies will help Canadians in the long run. Canadians may have got the message. A recent CIBC World Markets report shows that Canadians have started to slow their growth of consumer debt.
These new CMHC rules apply to all newcomers to Canada as well. Of particular note for companies hiring employees into Canada is that those employees will be required to complete their probationary period with the company before they will qualify for a mortgage. These measures, among others, appear to be working as stability has, at least for the time being, returned to the Canadian housing market.