On January 17th, Finance Minister Jim Flaherty announced new federal rules on government-backed Canada Mortgage and Housing Corporation (CMHC) mortgages. The new rules will:
- Reduce the maximum amortization period to 30 years from 35 years for government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.
- Limit the maximum amount homeowners can refinance their home to 85% from 90% of the value of their homes.
- Remove government-backing of lines-of-credit secured by homes.
The impetus for such changes has come from experts such as Bank of Canada governor Mark Carney, who has warned that Canadian debt is reaching unsustainable levels. And even though BC's housing market is more susceptible to these changes because of our relatively higher price-points, the changes outlined are targeted more at how Canadians consume debt rather than curbing the real estate market. The government isn't trying to stop us from buying homes; they're trying to stop us from using them as ATMs.
CMHC was founded after World War II to provide housing for returning soldiers. In the intervening years, its primary function has shifted towards providing mortgage insurance for individuals who wouldn't otherwise have qualified to purchase a home. Most lenders are not allowed, by law, to lend more than 80% of the value of a home without insurance; CMHC provides that insurance to those lenders to offset the increased risk, allowing individuals to get a mortgage with as little as 5% down. These new rules target borrowers at the margin, or those who choose to extend themselves to the maximum extent.
With regards to the housing market, the only real dampening could come from the reduction in the maximum amortization period. According to BMO deputy chief economist Douglas Porter, this change will effectively reduce the maximum amount an individual could borrow by 7%. That said, very few borrowers max out the amount that they can borrow, meaning that its effect on the housing market will be limited. According to Benjamin Tal, deputy chief economist at CIBC World Markets, "the impact is insignificant."