Minister of Finance, Jim Flaherty announced 3 new mortgage rules to take effect on April 19, 2010. Keep in mind that these apply to Government backed mortgages – CMHC insured. Here are the rules which are excerpts from the announcement , the breakdown, and how they will impact Canadians:
1. Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
My Commentary: Most lenders already require that in order to qualify for a variable rate mortgage, a client has to qualify for the higher rate which a 3 year fixed rate is used. In this case let’s say that a client wanted a 1.95% 5 year variable rate mortgage, we would qualify them on the 3 year fixed rate of 3.50% when we submit to lenders. This gives an adequate buffer in case the rates rise by 1.55% and shows that the client will still qualify if rates jump to those levels. Now we have to use the 5 year fixed rate, which is currently 3.79-3.89% dependent on the lender. The difference is nominal at .39% more. I don’t see this affecting a tremendous amount of buyers.
2. Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.
My Commentary: For consumers that want to access the equity in their home by refinancing for debt consolidation, investments or renovations – they will have 5% less to access. I believe this will affect clients who have higher interest rate debt i.e. credit cards and unsecured lines of credit that they want to replace with a much cheaper rate via a mortgage refinance. Again, it is what it is and I cannot see this making a huge impact on consumers and I tend to agree with the philosophy behind this rule – equity should be built up on a home to cushion any changes in value that may occur. Although, I still believe we are not on the cusp of a housing bubble.
3. Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.
My Commentary: I am surprised by this change, I get what they are concerned about – speculators. Those consumers that are buying for short term gain i.e. purchasing condos and/or homes with the anticipation of flipping them within a short term. After the markets took their nose dive in September of 2008 consumers have leaned towards real estate investment as a safer home (pardon the pun) for their hard earned cash. Now they are being penalized for it in my eyes. A requirement from 5% as a down payment to 20% seems a bit extreme. My view is that this will do the trick to curb investors not to participate in highly leveraged real estate investments but this limits the opportunity from adding to their potential overall net worth. Keep in mind that many lenders allow financing of 20% down without the high ratio insurance premium. CMHC is NOT the only game in town. In any case, this will definitely affect the Toronto condo market and we have gone back to the old days where the average Joe can’t take advantage of real estate as an solid investment.
Keep in mind that this April 19th deadline is not set in stone and some lenders may adopt these policy changes earlier than that date. If you are interested in getting involved prior to the changes I suggest sooner than later.
Any questions or concerns please contact your Mortgage Broker or Mortgage Agent – or simply feel free to reach me at kim@mortgagesuperhero.com or 416-400-8107. I’m here to help.
Kim Gibbons Your “Mortgage Superhero ®”
Toronto, Ontario
