Finance Moves Again on Mortgages

In a surprise move Finance announced recently that it is again making changes to mortgage borrowing practices in Canada. The surprise is in the timing of the announcement given that the housing market is already starting to soften. The move probably reflects the realization that interest rates will remain unchanged for longer than previously expected, and is designed to prevent a resurgence in activity, like the one we saw in mid-2011.

A significant change is the modification to the length of mortgage amortizations for high-ratio mortgages (less than 20% down-payment). The previous change from 35 years to 30 years is not equivalent in terms of its impact on the market, to the current change from 30 years to 25 years. We expect the current change to have a much more significant impact on the market in general and first-time home buyers in particular. Also significant is the fact that the changes were implemented almost immediately (as of July 9) to prevent a last minute run by borrowers.

Finance did not touch down-payment requirements—probably due to the realization that such a move might be too aggressive given the current trajectory of the housing market. Overall we see the announcement as a much better substitute to interest rate hikes since the moves are precisely aimed at the margins of the mortgage market. The combined impact will not be large enough to derail the housing market, but are clearly significant enough to soften activity, and at the margin will act as a negative for house prices—mainly at the mid-range segment of the market.