Mortgage Changes in Canada

By Elli Davis, December 4, 2009

Housing Market Suffered a Drastic Change Over the Last Year.
Photo by "Woodley Wonderworks"

To understand the innovation and change that the mortgage market in Canada underwent, we first must make sense of the changes that occurred in the housing market.

The housing market is one of the many factors along with the Canadian economy and monetary policies that influenced the transformation.

Looking at affordability measures that compare payments on houses to income show us the drastic change the housing market suffered over the last year or so. We see the same results when we look at charts depicting house prices, price-to-rent and price-to-income comparisons. When they are all combined they show a declining trend in house prices in late 2008 and beginning of 2009 and lately have been showing signs of recovery. The reason resale prices have been driven high recently is the combination of sales recovery with tight supply conditions. To get more detail on the recent changes in the housing markets around the world, read the article Canada and International Housing Markets.

Mortgage market innovations

So how did the Canadian mortgage market change? Canada is one of the few countries that decided to pursue mortgage innovations while other countries have detracted from such activities. The innovation only started after the federal government liberalized mortgage insurance in the spring of 2006. Strong bank capitalization, a sounder banking market, more pro-active central banks and other factors formed a decent base for the innovations to build on. So far, all the changes occurred in a traditional conservative sense but without a doubt, we can already see the market changing. The mortgage market innovations, which make housing more affordable in the short term, however, heighten the risk of default in the long term. We can also accredit the innovations for delaying the housing market slowdown in 2008 but not preventing it because the situation clearly made it inevitable.

Mortgage amortization periods

When talking about mortgage amortization periods, three years ago, there was only one option to chose from, that being 25 years. But after the changes in 2006 took place, 30, 35 and 40 year amortizations became available. According to the experts from Scotiabank group, after just three years, 18% of outstandings are over 25 years and 10% and less are 35-40 years. As a result of this change, in the past year, 47% of new mortgages had amortizations longer than 25 years and 60% of these percentages were in the 35 and 40 year mortgages. Sadly, the option of insured 40 year mortgages is no longer available. In July 2008, AIG joined CMHC and Genworth in announcing the end of insured 40 year amortizations and 100% financing. However, uninsured 40 year mortgages are still available.

Mortgage Equity Withdrawals

Equity take-out financing used to be more difficult before more flexible mortgages and secured lines became available. Over the past year, 18% of Canadians withdrew equity from their homes with the average amount being $41,000. Nowadays, the results are similar in the US although before the 2008 housing market slowdown, Canada had retained much higher homeowner equity, but the US‘s position had deteriorated even with a stable level of rising prices.

Mortgage terms

Mortgage terms have not seen a major change with the innovations, but differ in their nature a bit. For example, by comparing fixed rate mortgages in Canada and in the US we see that the most common terms offered in the US are 15 and 30 year mortgages, but shorter terms are available. Also 40 and 50 year mortgages are now available. These are common in areas with high priced housing. In Canada, the longest term for which a mortgage rate can be fixed is typically no more than 10 years. This means that in a rising rate environment, Canada has an advantage over the US fixed rate mortgages since the US borrowers have relatively unstable rates for the long run whereas in Canada, the fixed mortgages are a subject of rate resets.

Other innovations

Insured investor mortgages are also worth mentioning when it comes to mortgage innovation. They’ve become more significant since their introduction about three years ago. Before this time, the total number of investor mortgages was very low since mortgage insurance wasn’t available at that time. With the introduction of this option, they’ve become very attractive by lowering the cost of capital for borrowers.

Mortgage innovation was a great step that Canada took after years of no action in this field. It definitely serves as a positive factor of raising the Canadian housing demand and helping to reduce the house price inflation that we’ve been seeing lately.  

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