35 Year Amortization Option Ending

The government has set March 18 as the last day for 35 year amortizations. Key points to be aware of:

1. Lenders will likely stop accepting applications for 35 year amortizations in advance of the March 18 cut off.
2. Approved deals that close after March 18 can still have 35 year amortizations as long as the deal is approved by CMHC/Genworth prior to the date (assuming the lender accepts the deal)
3. Longer term amortizations on conventional deals (greater than 20% down payment) will remain an option with many lenders. In fact 40 years is still available.
4. Porting/moving a mortgage to a new property upon sale of an existing property is not impacted as long as new money is not required. If new money is required then a blended amortization may be an option. However taking the new mortgage with a max 30 year amortization may also be required.
5. This change is great news. The biggest mistake the government made was extend amortizations from 25 years in the first place. Expect that in the future we will see it pulled back to 25 years.
6. Prices will adjust (slowely) to the new amortization. While not so much when supply is low and demand is high, but as we move to a more balanced or a buyer's market, prices will adjust. I don't believe this will happen until the full effect of the shorter amortization is implemented - likely the fall/winter 2011 market.

 

Here is the full announcement:

Release: Department of Finance tightens CMHC rules

 

• For the second time in twelve months, the Department of Finance tightened rules on residential mortgages to help slow the pace of household debt accumulation. Changes include shortening the amortization period to 30 years (which had already been shortened from 40 to 35 years in 2008), withdrawing CMHC insurance of home equity lines of credit (HELOC), and a reduction in the maximum refinance percentage from 90% loan-to-value to 85%. Changes to the amortization period and the refinancing ratio will take effect March 18 and the HELOC change will take effect April 18, 2011.

 

Key Implications

 

• The amortization change may alter the quarterly profile of housing market activity as some sales are pulled forward by households to pre-empt it. But the impact is not expected to be large, nor does it lead us to alter our annual forecast. Existing home sales were already forecast to weaken by about 8% compared to 2010, and prices to slip by a modest 1%. On aggregate, our calculations suggest that 20K sales (annually) may be impacted by the amortization change, with the average price likely to weaken a further percentage point. However, while the last few months of data represented upside risk to our December forecast, today’s measures put our forecast back on track.

 

• The other two changes are more likely to impact consumer durables and housing-related spending. Fro instance, household usage of HELOCs is mostly directed towards renovations, vehicle purchases, and debt consolidation. Yet, on that front as well, the impact is not expected to be large. Our macroeconomic forecasts already embedded a significant slowdown in household debt accumulation and consumer durable spending. The withdrawal of HELOC insurance may cause some substitution toward more traditional mortgages, but very few financial institutions insure their HELOC portfolios.  As such, the change is unlikely to register significantly on the aggregate lending scale. Moreover, less than a fifth of refinancing deals are high loan-to-value (LTV >80%), and lowering the LTV threshold to 85% likely impacts less than a tenth of refi loans through lower amounts and/or alternative vehicles. All said, aside from some distortion on the timing of some heavily credit-dependent activities, the policy changes do not alter our forecasts.

• In terms of monetary policy, this helps take some pressure off the Bank of Canada (BoC).  With all the talk about the non-sustainable pace of household debt accumulation, there was speculation about whether or not the BoC would consider hiking interest rates for reasons not directly related to its inflation-targeting mandate. Such speculation can be put to rest for the time being, and we can go back to focusing on the inflation outlook.