This week's post comes to us care of veteran investor and mortgage broker Peter Kinch. Here is his take on the recent mortgage rule changes and announcement of Firstline Mortgages closing:
As we entered into the summer of 2012, the Canadian mortgage landscape was undergoing another overhaul of change. There were two significant announcements that created a lot of fear and confusion in the marketplace. The one that grabbed the most headlines was that Jim Flaherty has once again made changes to the mortgage rules. However, of equal importance to a number of Canadian mortgage holders, Firstline Mortgages, a division of CIBC Mortgages, announced they were shutting down their operations as of July 31st. Both of these were major announcements for our industry and both provided a great deal of confusion and uncertainty in the marketplace.
I have found it rather disconcerting to hear the odd random comment on what all this means to the future of the Canadian homebuyer, so I thought a little clarity may be of assistance. I would love to go on about the ‘wisdom’ of the government’s latest decision to tinker with the mortgage rules in an ongoing effort to ‘legislate’ a change in our borrowing habits, but for now, I’ll stick to a summary of what the new rules really are – and, more importantly, what they are not.
The most significant rule change is to the maximum amortization, which has been moved from 30 to 25 years. The amortization is the period over which you can pay off your mortgage. It is easier to pay off a $300,000 mortgage if you can spread those payments over 30 years instead of having to pay it off in just 25. Having said that, the longer you take to pay that loan off, the more money you will pay in interest. So in some respects, Mr. Flaherty is doing us a favour. Other rule changes included a limitation to how much we can borrow on a line of credit (maximum 80% of your home value) and not allowing a High ratio insured mortgage for homes that are valued over $1 million. So here are a few points to help maintain perspective:
- These rule changes apply to high ratio (insured) mortgages only. Many lenders are still allowing 30 year amortizations on conventional loans (minimum 20% down payment) for now.
- The majority of homeowners do not have high ratio mortgages so these rules do not have an impact on them.
So who will this impact and how will it affect the real estate market? The difference between being able to take 30 years to pay off your loan as opposed to 25 will have a significant impact on younger couples looking to get into the housing market. First time homebuyers and those on a tight budget will find they simply can’t afford to buy that larger home or, in the case of cities like Vancouver, the smallest of condos. There is no question that many young potential home buyers will be negatively impacted by these new rules and the fallout will trickle down to a slowdown in the overall housing market.
But isn’t this exactly what Mr. Flaherty and company wanted in the first place? After all, he has been trying to convince Canadians for months that we are getting carried away with low-interest loans and becoming over-burdened with low-cost debt. He has warned us numerous times that if we do not get our spending under control before interest rates rise, we will be in for a shock. But Canadians didn’t listen – instead we continued to take advantage of the low-cost debt to buy more real estate and as our debt increased, so too did the real estate market. So if the people cannot be talked into changing their spending habits, they will need to be legislated into it. Will these new rules create the desired effect the government is looking for? Or, as many believe, have they gone too far this time and will the result be an overcorrection in the market place at a time when the global markets are already throwing us enough curveballs?
Here’s my prediction: I fully expect lenders to adjust to the drop in volumes by counter-acting with lower rates to offset the impact of lower amortizations. This will lure borrowers back into the marketplace and by this time next year, Mr. Flaherty will be threatening the banks and not the borrowers. Time will tell who is right.
In the meantime, Firstline mortgages, long considered the #1 choice amongst mortgage brokers due to their wide variety of mortgage offerings for both the homeowner and the investor, has decided to close its doors. This quite frankly, was even more shocking to me than the news that Flaherty was changing mortgage rules again. When a major player like Firstline vacates the market place because they don’t believe they can be profitable, that is cause for concern. However, if you are a Firstline mortgage holder please do not panic. The answer as to what happens next is very simple:
CIBC will assume all existing Firstline mortgages and take over the administration of such. When your mortgage comes up for renewal, you will simply be given a list of renewal options from CIBC. If you choose one of those options, then life will carry on just as before, except that your mortgage will be with CIBC instead of Firstline (which was a division of CIBC). In other words, you should experience no changes and no hassles. Your mortgage will not be ‘called’ and you will not be forced to ‘refinance’ – which is good news for some of you. In most cases, you will simply sign the renewal notice and carry on. The one option this does afford you though is the ability to shop for alternative lending options at the time of your renewal since you are not committed to staying with CIBC. Please feel free to email me if you have any questions regarding your specific situation.
In general, I am not concerned about the welfare of any existing Firstline mortgage holders, but I do lament the fact that we have lost another lender in the marketplace and whenever one leaves, it makes the entire market less competitive. Firstline has been a very ‘investor-friendly’ lender for years, but the writing has been on the wall. Much like Flaherty’s decisions to change the rules, time will tell how their departure will impact the marketplace – but for now we are faced with another change in the lending landscape and we will adjust accordingly – we always do.
Until next time – happy investing!
If you're interested in rising above these mortgage changes and keeping your investment portfolio on track, be sure to check out REIN™'s 'Raising Capital' Training event coming to Calgary on August 25th. For more information and to register, click here.