Monday, July 14, 2008

Ottawa revamps mortgage rules

Hello reader,

The federal government announced yesterday that as of October 15th, 2008, they will no longer be guaranteeing mortgages amortized beyond 35 years, or mortgages with less than 5% down payment. Please read the article below for full details. There are basically three companies currently providing mortgage default insurance in Canada. CMHC, Genworth Financial, and AIG.

This announcement refers to government backed mortgages only, namely CMHC, and will not necessarily affect the other two insurers. This doesn't mean the other two insurers will not follow suit, but it does mean that they are not obligated to. Both Genworth and AIG will be having meetings in the near future to discuss their existing product line and any changes they want to make, if any. There are also some alternative lenders who are self insuring and are currently offering 40 year, 100% financing products, so even if all three mortgage insurers drop these products, they still may be available beyond October 15th, although, at a higher rate.

In the meantime, everything will remain the same and 40 year, 100% financing products will still be available until mid-October.

Today's lowest rate on a five year fixed is 5.45% and the lowest variable rate is 4.15% or 0.60 below prime (although there are teaser rates available as low as 2.51% below prime)

Ottawa revamps mortgage rules
Globe and Mail Update, Reuters
July 9, 2008 at 4:36 PM EDT
OTTAWA — The federal government says it will no longer guarantee 40-year mortgages, one of a handful of measures aimed at guarding against a U.S.-style housing bubble.
The Finance Department said Wednesday in a news release that the government will guarantee no mortgages with durations longer than 35 years. The government also will demand a minimum down payment equal to 5 per cent of the value of the home.
"Today's announcement marks a responsible and measured approach by the government to ensure Canada's housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada," the Finance Department said.
The government hastened to emphasize that Canada's housing and mortgage markets were performing much better than in the United States.
Canadian housing prices are in line with economic factors such as low interest rates, rising incomes and a growing population and the demand for residential housing remains buoyant at more than 200,000 housing starts a year, it said.
The percentage of bank mortgages in arrears is also stable at 0.27 per cent, the lowest levels experienced since 1990 and well below the highs of 0.65 per cent in 1992 and 1997.
"The historically prudent and cautious approach taken by Canadian financial institutions to mortgage lending, combined with a sound supervisory regime, has allowed Canada to maintain strong and secure housing and mortgage markets," it said.
It nonetheless noted "accelerated financial innovation" in the mortgage markets since the fall of 2006, for example, allowing loans up to 100 per cent of the value of the house and increasing amortization periods to 40 years from 25 years.
The government will now require a consistent credit score for mortgages it backs, and a minimum level of loan documentation standards to ensure evidence of the reasonableness of property values and the borrowers' income.
In addition, government guarantees will not be allowed for high-ratio mortgages where amortization is not required in the first few years – e.g., mortgages that begin with interest-only payments.
Finally, it will set a maximum of 45 per cent on a borrower's debt-service ratio – the proportion of gross income that is spent on debt service and housing-related fixed or essential payments.


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