Department of Finance Tightens Mortgage Regulations Once More

Posted on January 17th, 2011 in News | No Comments »
  • For the second time in the last 12 months, The Department of Finance tightened the regulations around residential mortgages in an attempt to slow the increase in household leverage and buttress the wider financial system. The specific changes were well-telegraphed, and included shortening the amortization period to 30 years (note that the period was already shortened from 40 to 35 years in 2008) withdrawing the backing by the CMHC of home equity lines of credit (HELOC), and a cut in the maximum refinance percentage from 90% to 85%. These changes to the amortization period and the maximum refinance amount will take effect on March 18th while the HELOC change will occur on April 18th.
  • In assessing the impact on the housing market, we anticipate that some sales activity may be pulled forward as households attempt to get in front of the changes. We saw a similar dynamic last February in response to the previous round of changes in regulation. On balance, this will add an extra amount of volatility that will obscure what is still expected to be a soft landing in the housing market. In terms of its impact on the wider economy, the change to the regulation of HELOCs could contribute to a lower rate of consumer credit growth, as without the backing of CMHC, financial institutions may become more cautious in extending credit.
  •  There had been some talk of the Bank of Canada raising rates earlier in order to slow the growth rate of household debt, but we think that today’s announcement will help to quash that idea. So this announcement supports our forecast for rate hikes beginning in July, with the Bank taking the overnight rate to 2.0% by the end of the year. While the Bank has been quite vocal about the risks to financial stability posed by rising levels of household debt, its mandate is exclusively focused on the 2% inflation target.
  •  Looking further into the future, the current inflation-targeting framework will expire at the end of the year. Several speeches by Bank officials have highlighted the idea of incorporating the impact of asset prices (the so-called “lean” approach to monetary policy) into the interest rate decision process. However, we feel this debate remains in the academic sphere, ensuring that the Bank will remain focused on achieving its inflation target.

Phil Fragale

Area Manager, Mortgages and Finance Specialist

Greater Toronto Area

TD Canada Trust

 

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