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Finance Minister Jim Flaherty has made the following three announcements to mortgage insurance rules:
1. Variable mortgages qualified at five year fixed rate;
2. Refinancing limited to 90% instead of 95%;
3. Non owner occupied residences require 20% down payment;
These changes will take effect April 19th. See article below:
Finance Minister Jim Flaherty announced new rules Tuesday aimed at preventing homebuyers from getting into financial difficulty when mortgage rates rise.
After consulting with major Canadian lenders, Flaherty outlined the latest weapons at Ottawa’s disposal aimed at removing some of the speculative froth in the housing market.
“There is no evidence of a housing bubble, but we’re taking prudent steps today to prevent one,”
“If some lenders aren’t willing to act themselves, we will act.”
Broadly speaking, the plan unveiled has three components.
First, Ottawa will require that all borrowers meet the standards for a five-year fixed-rate mortgage, even if they choose a variable mortgage with a lower rate or a shorter term.
“This will guard against higher rates in the future,” Flaherty said.
Second, the rules would lower the maximum Canadians can withdraw when refinancing their mortgages to 90 per cent of the value of their home, from 95 per cent.
And finally, Ottawa will now require a minimum 20 per cent down payment to qualify for CMHC insurance for non-owner-occupied properties purchased as an investment.
The last rule is aimed at reining in would-be real estate speculators who own multiple properties beyond their primary residence.
“We want to discourage the tendency some people have to use a home as an ATM, or buy three or four condos on speculation,”
Flaherty said.
Minimum down payment unchanged
There had been speculation the Department of Finance might implement legislation raising the minimum down payment from five to 10 per cent of a home’s value, or reduce the maximum amortization period from 35 years to 30 years.
Those measures were not part of Flaherty’s announcement Tuesday, but all options are still on the table should circumstances change, Flaherty said.
The adjustments to the mortgage insurance guarantee framework, to be implemented as of April 19, 2010, are not likely to revolutionize the industry. Indeed, a number of large Canadian lenders already practise the first peg of Flaherty’s plan. After Tuesday’s announcement, Bank of Montreal noted that it requires its high-ratio borrowers to be able to qualify using the five-year rate.
“While we do not believe that Canada faces a housing bubble, we fully support the minister’s actions,”
the bank said in a release.
“Given the prospect of higher interest rates and the recent run-up in housing prices in some markets across Canada, the measures announced today are prudent.”
“This is a little bit late in telling Canadians we need to be more cautious in taking out a mortgage,”
Royal Bank chief economist Patricia Croft said in reaction to Flaherty’s announcement.
Though she stopped short of calling Canadian real estate in bubble territory already, she said the April 19 date for implementation is actually likely to cause more short-term stimulation of the market, as people scramble to get in under the deadline.
“If you wanted to buy a house, wouldn’t you now do it before April?” Croft asked. “It’s even more evidence that house prices are going to cool down later this year.”
Financial Lessons for the People of Canada
As Canadian consumers waded deeper into debt during the so-called Great Recession, the federal government decided it was time to boost financial literacy, a life lesson many Canadians missed before their balances plunged deep into the red.
Finance Minister Jim Flaherty launched the Financial Literacy Task Force in June, citing his belief that a financially literate population would create a more stable economy.
“Our economy is built on millions of everyday financial decisions by Canadians.
Recent events have shown us that there are major risks and that financial literacy is an important life skill. Whether it is a question of saving for retirement, financing a new home or balancing the family chequebook, improving the financial literacy of Canadians will add to the stability of our financial system and make our economy stronger.”
The Task Force on Financial Literacy is to provide advice and recommendations to the Minister of Finance on a national strategy to strengthen the financial literacy of Canadians. The strategy will outline:
- Overall objectives, as well as a focused, concrete plan of action to strengthen the financial literacy of various groups of the population;
- How to leverage existing resources to enhance financial literacy in Canada;
- How best to promote financial literacy among the Canadian population;
- A framework for collaboration among all stakeholders, including governmental organizations at every level, that would maximize financial literacy efforts and limit duplication;
- How the different stakeholders should collaborate to advance the state of financial literacy research in Canada; and
- How to assess progress in the implementation of the national strategy, including identifying appropriate timelines and milestones for achievement.
After a 20-year trend of increased household debt and reduced savings, combined with easy credit and dwindling pension plans, financial planning must be ingrained in Canadians, said Tom Hamza, president of the Investor Education Fund, an arm of the Ontario Securities Commission.
“The recession has caused us to focus on these things to a certain extent, but these problems have been brewing for a long, long time,” he said.
The fund is part of a working group charged with figuring out how to integrate financial lessons, such as how loans and credit work, into Ontario’s curricula for Grade 4 to 12 students by September 2011.
Hamza said that educating children about money matters can help combat some of the damaging examples many parents have inadvertently taught their children over the last two decades.
“That is the exact time period that our household debt levels have gone up, our savings levels have plummeted, and we’ve changed our perspective from ‘Can I afford it?’ to ‘Can I afford the payments? That’s the circumstance in which our kids are learning.”
Canadians students have had very little exposure to managing their future and budgeting, adds Stephen Ashworth, a former teacher and current vice-president of education at Junior Achievement Canada.
JA Canada is sharing ideas from its financial planning seminars, offered in classrooms across the country, with Flaherty’s task force.
“We really owe it to our students to teach beyond just the basics of financial literacy, so they can make sound decisions around managing money and credit,” Ashworth said.
He said parents should sit down with their children and discuss what it means to budget, or be in debt, and involve them in the family budgeting process.
He suggested offering small financial or other incentives for kids to help parents cut back on the household phone bill or heating costs.
Parents can also help their children learn proper savings techniques by putting away a portion of their allowance every week to save for a larger purchase.
Meanwhile, older members of the demographic, sometimes referred to as “Generation Debt,” are accruing debt at rates never seen before.
A recent Harris-Decima poll suggests that 60 per cent of baby boomers financially support their adult children, and while a majority said they were financially self-sufficient by age 21, they expect their children’s independence to be delayed to age 25.
Jane Olshewski, manager of financial life planning at Investors Group, says the phenomenon is attributable to the fact that young people are pursuing post-secondary education in larger numbers than ever, and many are taking on exorbitant debt to pay for it.
“If this generation is going to school in a higher percentage of numbers, and taking on debt in order to obtain that education, of course it’s going to take them a little bit longer (to become independent) than generations in the past,” she said.
Compounding the setback of massive debt, recent graduates just entering the workforce have found that in the post-recessionary job landscape they enter the bottom of the seniority ladder.
“This economic downturn caused kids to say ‘I either lost my job or my career path has slowed down a bit, I have to go back home now to regather my financial footing,”‘ Olshewski said.
The survey also found that 20 per cent of graduates live with their parents, many rent-free.
Olshewski noted that delayed independence means saving begins later in life than for prior generations. So parents should encourage their kids, who aren’t paying for day-to-day living expenses, to save for retirement, a down payment on a house, or to pay down debt.
She added that parents should consider introducing their children to a financial planner who can help prioritize their finances.
“A big part of what a financial planner does is help people understand this world of finance that we live in,” she said.
But while baby boomers struggle to support their children longer, Depression-era grandparents are dying off, and so too are the lessons they can impart about budgeting and frugality, Hamza said.
“We have to give people the basic tools (in school) so that they can comprehend how to assess the various financial decisions they have to make over their lifetime,” Hamza said.
“Not so that were graduating sophisticated investors, but we are graduating people that understand the basics and the expectations on them as citizens.”
Housing bubble is “not an immediate concern”
Hints by Finance Minister Jim Flaherty that Ottawa may tighten mortgage eligibility rules if it sees evidence of a housing bubble are setting off some jitters in the financial sector.
The aim of the tightening would be to avert a possible housing bubble, but some analysts say a cautious approach is needed to avoid damaging the economy. Senior economist Benjamin Tal at CIBC says going too far could slow down or even shut down the housing market – a market that is a major contributor to overall economic growth.
“That is a risk they have to take into account, because the housing market is a major, major contributor to overall economic growth and we are still in a very fragile state of the recovery.”
However, Tal took some comfort from the fact that Flaherty was not specific as to the numbers it might consider.
“The trend (on consumer debt) is not extremely positive but the situation is not alarming,”
“I think they’re concerned about the next 12 months and where we will find ourselves a year from now. So they’re trying to be pre-emptive here and basically start to make sure the inflow of new business is of a higher quality.”
“Therefore I don’t expect this to be a huge increase (that would have)… an unreasonable and unnecessary impact.”
The Bank of Canada in recent weeks has warned repeatedly that record household debt is the biggest risk facing the country’s financial system. The central bank did note that the risk to Canada’s banking system was small, but worried that when interest rates rise to normal levels, up to 10 per cent of households could face difficulties in meeting monthly payment requirements.
Flahert said one thing the government will likely do is increase the minimum down payment on residential mortgages from five per cent “to a higher figure.” It may also reduce the amortization period from the current maximum of 35 years. However, in a recent interview, Flaherty emphasized that the prospect of a housing bubble is “not an immediate concern.”
“If we needed to act, we could do what we’ve done before, in the summer of 2008, and that is to increase the down payment requirements for insured mortgages.”
“I haven’t looked at what we might do in terms of quantum (size of increase),” he said, adding that the government might also shorten the maximum amortization period or take other, unspecified measures to tighten lending requirements.