Housing Concerns – Banks React To Tighten Lending To Self Employed & New Immigrants
While everyone has been talking about how prices of houses and condominiums have been going up all across Canada, it appears that banks have begun to respond to these concerns and tighten the lending rules for self employed, new immigrants and high risk home buyers.
CIBC’s mortgage division, FirstLine Trust, today announced that it will not accept new mortgage applications from “stated income” homebuyers. The buyers will need to document and prove that they have the annual net income to qualify for home loans. This is likely to affect self employed people and new immigrants who may not be able to satisfy this condition of the bank. While it is only Firstline mortgages that has introduced this qualifying condition, others are likely to follow. The lending limit has also been set to a million dollar for any home purchase.
For the last few years, steady, periodic warnings have come from economists, CMHC, government officials, including Canadian Finance Minister Jim Flaherty and the Bank of Canada Governor, Mark Carney, that the Canadian housing prices have risen to a level which is not sustainable. Every time there a warning was, the following month’s statistics showed a further increase in prices, suggesting that people were in no mood to heed to the warnings. The government did little to deter this buying frenzy, except to express their concerns regarding record levels of household debt, fuelled by historically low interest rates.
Most of the real estate is bought by raising a mortgage against property. Any change in the lending rules should have a direct impact on the ability of people to buy homes and other real estate. The federal government has set a limit of 600 billion dollars on insurance for CMHC and it is rumored that CMHC is approaching this limit. There has been an increased demand for large loans and this is not going to help the overheated housing market either. CMHC has not changed any rules as yet, but it may do so down the road, to cool the overheated market. As of Sept. 30, CMHC had insured $541 billion in loans, up from $501 billion a year earlier. Just three years ago, CMHC was insuring only $450 billion in loans and asked Ottawa for approval for the $600 billion cap.
The present strength in housing prices has only one explanation –historically low mortgage rates coupled with central government’s policy statement that it will keep the rates low till year 2014. The Job situation, however, remains bleak, income levels are not keeping pace with the housing prices. Canadian borrowing, the household debt to income ratio,
(http://Mortgage-Payments.ca/ ) has already exceeded the levels of US that were present when the meltdown in US housing prices began.
The current tightening of mortgage rules by one institution is too little, if not too late; it is not likely to have any significant impact on
speculative buying. A strong action by the federal government to cool the market is needed, if we really want to escape the meltdown like that of US real estate. I have heard before, the meltdown will not happen in Canada, Canada is different. Is it? Whether the Canadian housing market is more of a balloon than a bubble is a matter of only semantics. People should be worried, one day, sooner or later, rates will go up and tens of thousands of people who have bought and over bought the homes will not be able to carry.
Historically borrowers have not been able to manage more than 20% increase in the monthly mortgage payments. Only time will tell, if Canada is different.
The author, Nawel K Seth, MBA, is a veteran in the field of Real Estate and Finance with over 40 years of diversified experience and is a regular contributor of articles on the web and seminars. He can be contacted at 416-630-1999 / 905-660-7999 / 1-866 890 1999 or by email info@Mortgage-Payments.ca
Processing your request, Please wait....
