Another month, another housing market change. On November 30th another new set of mortgage rules came into effect. This follows the first set of mortgage rules changes introduced October 17. The second round of mortgage rules can be a little more complicated. To better understand them, it helps to first know how non-bank (monoline) lenders fund their mortgages.
After November 30th, certain mortgage types are no longer eligible for bulk insurance. Bulk insurance, also known as portfolio insurance, is used by lenders to pool together mortgage loans, package them up into bonds and sell them to investors (known as securitization). Bulk insurance protects your lender in the unlikely event that you default on your mortgage and your lender isn’t able to recover the full money owed to them by selling your home.
Although the big banks and credit unions use bulk insurance, it’s mainly used by non-bank lenders. Non-bank lenders, such as First National, Street Capital and MCAP, are at a disadvantage compared to the big banks and credit unions, who can use deposits to fund their mortgages. Non-bank lenders use bulk insurance because it’s a very cheap source of funding. Under the new rules, mortgages no longer eligible for bulk insurance include amortizations over 25 years, rental properties, refinances and properties worth over $1 million.
What Do the New Mortgage Rules Mean for Homebuyers?
In a nutshell, the latest mortgage rules mean that it’s more expensive for lenders to fund mortgages. Since their funding costs have gone up, lenders are already passing these costs along in the form of higher mortgage rates. Refinances are seeing the biggest rate increase, rising 0.10% to 0.25%. With some non-bank lenders offering fewer mortgage products in light of the new rules, less competition also means higher mortgage rates.
One of the biggest rule changes to directly impact first-time homebuyers is the limit to 25-year amortizations. When I bought my house, I went with a 5-year fixed rate mortgage amortized over 30 years. I chose a 30-year amortization over 25 for the payment flexibility. Although I always planned to pay down my mortgage quickly, my thinking was that if I ever lost my job or ran into financial difficulty I wouldn’t be tied to a higher regular mortgage payment.
Under the new mortgage rules, this strategy may no longer makes sense. Since mortgage amortizations over 25 years can no longer be bulk insured, some lenders are now charging a premium for 30-year amortizations. Unless you’re financially disciplined and committed to taking full advantage of your mortgage prepayment privileges, this now means you’re probably better off with a 25-year amortization, especially if your lender is charging you a higher rate. However, this also means higher payments, which will inevitably affect the amount of money – and home – borrower can handle.
Killing the Goose That Laid the Golden Egg
With all the recent changes in the housing market, the government needs to be careful not to tinker too much with the real estate market. While I’m all for a soft landing as opposed to a hard one, too much change at once is risky.
The oil and gas industry and the real estate market used to be the two pillars of the Canadian economy. That all changed in 2014 when the price of oil came tumbling down. With the real estate market the only remaining area of growth in the economy, the government should proceed with extra caution. So many jobs depend on the real estate sector in industries such as real estate, home renovations and home construction.
The new stress test to protect homebuyers for buying “too much” home (something I discuss in my upcoming book, Burn Your Mortgage),was a step in the right direction. But the problem is I don’t think the government anticipated higher bond yields from Donald Trump being elected to the White House. Since government bond yields influence mortgage rates, this has further raised mortgage rates by virtue of investors fleeing the bond market, causing prices to decline and yields to rise.
I don’t know about you, but as I mentioned in a recent interview with the Financial Post, if I was a first-time homebuyer, my head would be spinning from all the rules changes. Earlier this month the Ontario government doubled that provincial land transfer tax rebate for first-time homebuyers. The federal government also released a report on the National Housing Strategy.
Vancouver has seen the most changes with the introduction of a 15% foreign buyers tax and a proposed 1% empty home tax. There’s now talk of a deductible lenders would have to pay if borrowers default on high-ratio mortgages (less than a 20% down payment). This could lead to higher mortgage insurance premiums for homebuyers. The government’s even kicking around the idea of upping the minimum down payment from 5% to 10% for homes below $500,000.
Instead of introducing more policy changes, the government should be taking a wait-a-see approach – waiting for the dust to settle before making any additional changes. We don’t know how much higher bond yields will go, pushing up fixed mortgage rates along with them. What’s more, with the economy still uncertain, it’s possible home prices may flatten out or even decline, which combined with these various government policies could negatively exacerbate the effect.
It’s Still a Great Time To Buy
All that said, and despite the recent rule changes, it’s still a great time to purchase a home. If you’re thinking of buying a home in the coming months, I’d strongly encourage you to get pre-approved for a mortgage. Not only does a pre-approval let you know how much you can afford to spend on a home, it also comes with a rate hold that locks in your fixed mortgage rate for 120 days. With higher mortgage rates likely on the way in 2017, getting pre-approved for a mortgage is a no-brainer right now.