The government announced today some changes to the minimum criteria required in order for mortgage insurance to be offered on housing. The details are here.
This is fourth in a series of changes that the government has taken (the others being in October 2008, February 2010 and January 2011).
The more stringent requirement for retail people on the street will be the amortization requirement – from 30 years to 25 years. Plugging some sample numbers on a calculator, using a 3.00% rate, a 25-year amortization requires $473.25 in monthly payments per $100,000 mortgaged. A 30-year amortization would require $420.60 in monthly payments per $100,000 mortgaged, or about a 12.5% increase in the monthly outlay between 30 years and 25 years.
More relevantly for mortgage insurance, after a 5-year fixed period, at a 25-year amortization, approximately 14.5% of the loan would be paid off. At a 30-year amortization, about 11.1% of the mortgage is paid off. Presumably this would significantly reduce the risk of mortgage default after the typical 5-year fixed term.
Notably, the minimum down payment for a new owner-occupied residential purchase in Canada that will still qualify for mortgage insurance is still 5%. As a result, a residence purchased at 5% down, with a 3%, 5-year fixed mortgage at 25 year amortization will have about 18.8% amortized at the end of the 5-year term.
The tightening of mortgage credit will undoubtedly have a marginal economic effect of taking out higher-risk clients out of the housing market, which will have a marginal suppression on housing prices. I do not believe this will have a strong effect – that will be reserved for an increase in interest rates.