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New Mortgage Rules Won't Stop A Motivated Borrower

12/17/2015 03:51 EST | Updated 12/17/2016 05:12 EST
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Exterior view of house with sold sign, from front lawn

The federal government's recent change to the minimum down payment required on homes over $500,000 is being applauded by many as a way to cool down Canada's overheated housing market and ensure that homeowners have enough cushion in the form of equity before buying a new home or moving up.

There is already some protection in the market for prudent homeowners. Banks are not allowed to provide high-ratio mortgages (mortgages over 80 per cent of the purchase price) without some form of mortgage insurance through insurers such as the Canada Mortgage and Housing Corporation (CMHC). However, a homeowner unable to come up with a 20 per cent down payment and willing to take on extra costs and risk is still able to take out a high risk loan.

These new rules don't change that.

Yes, for a small segment of the population (those who can 'afford' a house over $500,000) the minimum down payment increased, slightly. For a home in Toronto valued at $1,000,000, a new purchaser now has to be able to provide an effective down payment of at least 7.5 per cent. However, for the vast majority of Canadians, there will be no impact on the risk they will be taking.

There are always workarounds for someone really wanting to borrow more to purchase a house. A recent study by the Canadian Association of Accredited Mortgage Professionals stated that loans from financial institutions accounted for seven per cent of all down payment funds, while parents and other family members provided a further seven per cent and a small segment admitted they withdrew funds from their credit card to finance their down payment. The new rules are likely to increase these percentages. New limits may force more borrowers to approach alternative lenders as a source for financing and may increase the percentage of parents taking out a second loan on their own home to help their adult children move into the housing market.

Our own mortgage study showed that while the average insolvent debtor had a mortgage ratio of 90 per cent, more than half had no equity value in their home at all. Somehow they managed to borrow well beyond these limits (often with a second and third mortgage) that ultimately collapsed due to missed payments.

A second review of heavily indebted home owners by our firm found that Canada's five largest banks are indeed reducing their direct exposure to high risk mortgages. What's more, brokerage based lenders, including private lenders and mortgage investment corporations, accounted for more than one in four secured mortgage insolvency claims. Insolvent home owners who borrowed through a mortgage broker were most likely to take on higher risk. On average they had the highest average mortgage, a higher encumbrance ratio, and the highest total debt-to-income ratio.

What this tells us is that people will borrow if they want to and the changes to mortgage rules are not likely to stop this, given the increase in options available to consumers and the eagerness to capitalize on a still rising market, at least while it lasts.

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