The Canada Mortgage Housing Corporation is government owned and provides mortgage insurance to banks and lenders. If a home goes into default, the property is sold and the CMHC will cover any losses. This year they were authorized to guarantee up to $85 billion under the National Housing Act Mortgage-Backed Securities Program (NHA MBS), but as of the end of July about $66 billion had already been secured. The total for all of 2012 was $76 billion.
Finance Minister Jim Flaherty has once again made a move to slow the market and cool off lending by scaling back eligible loans the CMHC will insure. Last week, CMHC advised lenders it is restricting how much money it will to insure on new loans to $350 million per institution. The countries major banks comprise most of this group.
Analysts predict this cap will make it more difficult and expensive for banks to obtain funds to lend to their customers, an expense which will likely be passed on to new lenders by way of increased mortgage rates.
TD economist Diana Petramala, who specializes in the housing market, estimated rates could rise anywhere from 20 to 65 basis points, or the equivalent of 0.2 to 0.65 of a percentage point. “Affordability will still remain in the housing market. Prices in most markets are now rising faster than income so it makes sense that the federal government, CMHC, may want to limit some of the risk-taking in the housing market.”
Rob McLister, editor of Canadian Mortgage Trends, downplayed the latest changes and said they amount to about 20 basis points or 0.2% percentage points on a five-year mortgage. “At that rate it’s $1,900 on a five-year fixed rate, $200,000 mortgage. It’s real dollars and cents to most consumers but I don’t think it’s going to have a real dampening effect on credit,” he said.
Peter Routledge, an analyst with National Bank says the latest changes could add anywhere from 0.15% to 0.45% percentage points to the mortgage rates.
This latest move by Flaherty comes just a year after the last mortgage tightening rules took place, a change that was the main reason for the slowdown last fall that continued into the early part of this year. In recent months many markets have begun to rebound, especially in Toronto where just this past July we saw an increase in sales by 16% over last July. It’s possible the upswing over the past few months instilled doubt that the market is not cooling as much as had been expected.
In an August 1 note to lenders, CMHC said “As a result of this unexpected increase in issuance volumes to date and to better manage volumes going forward, CMHC will be introducing a formal allocation process in late August.”
I personally think Diana Petramala is most accurate in her assumption that rates will rise by 0.2-0.65 percentage points. It’s very reasonable that this change, while not too drastic, will have an effect on some buyers in terms of how much they are willing to spend on a new home. This is all the more reason for sellers to get their properties on the market sooner than later and buyers should also strongly consider locking in at a low mortgage rate now, before the interest rates rise.