More Meddling from Above – Will it Help?
High rates and increasing house prices have made qualifying for a mortgage in Canada more difficult. Recent declines in mortgage rates have been helpful but housing affordability is still stretched. Meanwhile, the government sees the housing and mortgage markets as opportunities to score political points and has repeatedly intervened in the market, at times stimulating demand and other times trying to curb the increase in credit growth and/or house prices.
Two new measures recently announced by the federal government come into effect on December 15, 2024.
The maximum property value that can qualify for mortgage default insurance is increased from $1 million to $1.5 million. This is an attempt to lower the cost of down payments, especially in high-priced housing markets. For example, a minimum downpayment on a $1.5 million home would now be $125,000, which is $175,000 lower than the down payment required prior to this change. This rule change loosens a restriction put in place in 2012.
30-year amortizations are now available on insured mortgages for all first-time home buyers and to all buyers of new builds. This will reduce the cost of monthly mortgage payments so that more Canadians can afford a mortgage. The longer the amortization, the lower the payment, but borrowers considering a 30-year amortization need to be aware of the higher cost of debt servicing over the life of a mortgage with a 30-year amortization. This rule change partly reverses a restriction on mortgage amortizations put in place in 2012.
These recent rule changes are a continuation of frequent tinkering by the government in the mortgage market. Understanding the rules and keeping up with how they are constantly changing can be overwhelming, especially when bracing yourself against interest rate changes brought on by our central bank. Frank Mortgage was born from the belief that the mortgage finance system needs to focus more on the needs of customers. Despite Canada's stable market performance, regulatory changes have layered restrictive rules onto the borrower experience, altering the mortgage landscape significantly in the past decade. Due to our primary focus on the customer, we are concerned with how many of the challenges Canadians face today stem from broader government interventions. Many rule changes from the government work at cross purposes with regulatory changes and it is questionable whether they have been a net positive over time.
Have New Government Mortgage Rules Been Beneficial?
“I’m from the Government, and I’m here to help.”
The nine most terrifying words in the English language according to Ronald Reagan.
Have the myriad changes over the years been positive for the market? Government advocates will say yes. Those of us looking for evidence of these positive effects are never shown convincing data that proves their case. If you look to the overall state of the mortgage market, particularly through the lens of the individual homeowner, there are more problems today than there were over a decade ago. Despite Ottawa’s intentions, firsthand experiences of everyday Canadians navigating the housing and mortgage markets regularly show reduced affordability, unforeseen risks, and other negative outcomes contributed to, in part, by these frequent policy and interest rate changes.
History of Mortgage Rule Changes in Canada
Below is a list of the things our government, government agencies and regulators have done since 2010 that have a direct impact on mortgage borrowers. The key government entities that influence the mortgage market directly are the Department of Finance, the Canada Mortgage and Housing Corporation (CMHC) and the Office of the Superintendent of Financial Institutions (OSFI).
Some of these measures are prudent from an underwriting risk perspective. Some seem to be incentives for new borrowers to be able to enter the housing market. Others are reversals of prior policy limits - the definition of tinkering. In our opinion, the amount of meddling in the market by government has not been justified. The list above does not even include other measures implemented by the federal government, provinces, and municipalities such as foreign buyer taxes, vacant home taxes, buyer assistance plans, and others too numerous to list here. The flood of changes just keeps on coming with no accounting for whether the existing changes have had the desired effect and with little consideration for how they affect the average Canadian.
Have All the Mortgage Changes Helped Canadians or the Banks?
As government was tweaking the rules for mortgage underwriting, we experienced an unprecedented period of interest rate intervention from central banks. The Bank of Canada artificially suppressed interest rates for close to a decade. This incented aggressive risk taking and leverage, fuelling a boom in housing prices, particularly after they pushed rates to record lows during covid. This pushed housing prices higher, making homes in many urban centres and their suburbs out of reach for the average Canadian. The central bank’s material rate interventions distorted demand and pricing in the market, stretched borrower finances and heightened risk to a degree that overshadows any risk reduction that the Department of Finance and OSFI can claim to have achieved through their various rule changes. At times it feels like the greatest risks to the housing and mortgage markets are not market forces, but rather government and central bank action.
The Canadian mortgage market has been a stellar performer from a risk perspective for our banks over time. Given this, why the constant tinkering from OSFI and government? Have banks truly benefited from all the changes to an extent that justifies the numerous hurdles borrowers now face? We are left to wonder if banks would be no worse off and mortgage borrowers better off without this laundry list of changes. For example, over 20% of mortgage originations in some Provinces in 2023 went into the private mortgage market (vs. less than 8% just a few years ago). Is that the desired outcome? No one benefits from that, other than private mortgage lenders and mortgage brokers.
The common headline in today’s market is “housing crisis.” Some point to the Bank of Canada as the culprit, others to excessive risk taking, still others blame supply shortfalls. Whatever the reason, the finger points directly at Ottawa and they are now scrambling to find measures to assist borrowers and homeowners to try to undo some of the damage they inflicted.
Is The Central Bank on Our Side?
The central bank must balance a wide variety of economic factors. Housing is not their only consideration. However, housing must be a key focus since it is an outsized portion of the economy in Canada relative to other developed economies. Yet, it appears they are more concerned about macro economic measures that appeal to economists and Bay St. than they are about the needs and experiences of all of us on Main St.
In February 2021, when economic growth lagged and the Bank of Canada was forcing rates to historic lows, concerns were expressed that this may be overheating the housing market. These concerns were dismissed by the Governor of the Bank of Canada who stated, “the economy is weak …” and “we need the growth we can get.” Has there ever been a better example of central authorities focusing on macro goals at the expense of the individuals they are supposed to serve? It was simply reckless, short-term thinking that we are all now paying for. Only a year later they were rapidly increasing rates to try an undo the damage they had done.
“Rates are very low and they’re going to be there for a long time,” said the Bank of Canada Governor in July 2020. If a person of authority says that and then 20 months later, they hike rates at unprecedented speed, are they credible? Rates were increased by 4% over a period of six months in 2022. They then rose further in 2023, after the infamous ‘pause’. Lever up Canada, buy everything you can, and then we will pull the rug out and make it so you can no longer afford the leverage we encouraged – Sincerely, the Bank of Canada.
Government continues to believe that they can positively influence the housing and mortgage markets. However, when you look at the totality of their recent measures, including central bank actions, it is hard to feel good about their impact. We have not even discussed record immigration levels and housing supply shortfalls. The effort to centrally control the market all seems astonishingly unorganized and poorly planned. But hey, at least 30-year amortizations are available for first-time homebuyers, right?
What Now?
In this environment of uncertainty, mortgage borrowers are cautious. While rates have been declining, the key word for new homebuyers and mortgage borrowers remains affordability. Don’t try to purchase more home than you can afford. Don’t take interest rate risks that you cannot afford to be wrong with. Budget for the future, setting aside a cushion to absorb unforeseen events. If something good comes from all of this, hopefully it is just that – a return to discipline and a focus on affordability.
We fight for our customers every day, trying to get them the best mortgage deal possible. This is why it upsets us when we see attempts from above to engineer outcomes. These most recent changes will be positive for many borrowers trying to enter the market, but we do wish the tinkering from above would cease. Instead, our government should get out of the way and reduce red tape, taxes, and development fees so we can build the supply that would help balance the market for all.
We are here to help you with your mortgage needs in any market environment. We can help you with a mortgage for a purchase, refinance, or a switch. Not only can we find great deals, but we are focused on reducing your stress. Put us to work for you, we can help you navigate these uncertain times. Please give us a call at 1-888-850-1337and we can guide you through the mortgage process and find the home and financing you can afford. Or you can find us at www.frankmortgage.com.
Related Pages
Amortization Period Impact
Ottawa Announces Changes to Insured Mortgage Rules
The Impact of Declining Mortgage Rates on Canadian Mortgage Borrowers
The Prime Rate in Canada
First Time Home Buyer Incentives in Canada
