Feds rule out 40-year, zero-down mortgages
In an effort to protect Canadians from a U.S.-style subprime mortgage meltdown, the federal government is making 40-year mortgages with no money down a thing of the past.
The Department of Finance announced Wednesday that it will limit the maximum amortization period to 35 years.
The government will also require a minimum down payment of five per cent of the home's value. It will no longer guarantee mortgages in which the buyer has borrowed the total amount.
The new rules will take effect Oct. 15, 2008, and will not affect existing mortgages.
Currently, homebuyers can get government-backed insurance on mortgages, in which the loan-to-value ratio is up to 100 per cent. Under this scenario, the buyer has borrowed all the money for a home, and is covered by insurance for the entire amount.
Under the new scheme, homebuyers could still borrow the five per cent down payment -- but it won't be insured.
"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 in a statement.
The finance department says reducing the amortization period from 40 years to 35 years on a $200,000 mortgage, for example, with a six per cent interest rate, would increase the borrower's monthly payment by $41. The borrower would also save $49,000 in interest payments.
As home prices have soared, longer-term mortgages became increasingly popular with homebuyers seeking lower monthly payments. The maximum amortization period was extended from 25 years to 40 years in 2006.
According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), 37 per cent of new mortgages last year were for terms of longer than 25 years. But while 40-year-mortgages stretch out monthly payments, they can also dramatically increase the cost of a mortgage over its lifetime.
Bank of Canada governor Mark Carney raised concerns in April about relaxed mortgage standards. He told a Commons committee the central bank was watching the mortgage lending sector closely to ensure the U.S. subprime mortgage crisis does not happen in Canada.
Canada Mortgage and Housing Corp., a Crown corporation, is the country's largest insurer of home mortgages. The government also backs private mortgage insurers through guarantee agreements that protect lenders in the event of default by the insurer.
In the United States, the housing market saw a rash of foreclosures after low introductory rates for subprime mortgages lapsed and their monthly carrying costs skyrocketed.
Canadian banks and other lenders, meanwhile, haven't written many government-backed mortgages to borrowers with low credit scores, says the government. But to ensure this continues, the new changes will establish a credit score floor of 620.
Also under the new rules:
- Mortgages that begin with "interest-only" payments and home equity lines of credit will also not be covered by the government guarantees.
- There will be a set maximum of 45 per cent for the proportion of gross income spent on debt servicing and housing-related fixed or essential payments.