Canada Changes The Rules on Mortgages
Monday, February 22nd, 2010
On April 19 the Canadian Government will implement three major rule changes to hopefully circumvent a housing-price bubble and keep homeowners from becoming overextended.
These new rules apply to government-backed, insured mortgages only.
1. 5-Year Fixed Qualification Rates
Borrowers will now need to qualify using a 5-year fixed rate regardless of what term they choose. If you want a 1.95% variable rate, for example, you will need to show that you can afford payments at a higher fixed rate such as 3.89% for 5 years.
The government is claiming that “This initiative will help Canadians prepare for higher interest rates in the future.”We couldn’t agree more. In fact we’ve been telling you to maximize your mortgage payments if you are paying down a low interest variable-rate mortgage. Unfortunately for some, It will now be harder to qualify for a variable-rate mortgage, but not much harder. Most lenders already use three or five-year mortgage rates to calculate a borrower’s debt servicing ratios. For example, it is expected that for many lenders, the qualifying rate will rise from its current 3.25% (for a 3 year term) to around 4%. Thus not a very large difference but will hurt those that are tight on those ratios.
2. 90% Maximum Refinancing
No longer will borrowers be able to refinance their homes to 95% of it’s value. 90% will be the new refinance maximum.
The Fed claims that “This will help ensure home ownership is a more effective way to save.“ Thus, borrowers will be less able to pay off high-interest debt with lower-cost mortgage money.
On the upside, this rule has the positive effect of keeping equity in the home (which is quite helpful when home prices fall). It also discourages homeowners from relying on home equity to bail themselves out like when they accumulate debt. We forsee problems forthose people who need to consolidate debt in an effort to pay more principal and less interest. On the other hand, a 90% refinance limit is an effective tool in that it deters people from racking up debt and using their homes as if it were an ATM machine.
3. 80% Maximum Insured Financing On Rental
Those buying non-owner occupied rental properties will need to put down 20% to get an insured mortgage, as opposed to the 5% down previously required. However, This rule does not apply to multi-unit owner-occupied homes with rental units such as duplexes, triplexes and basement suites (legal or not).
We believe this rule to be the one most often abused through fraudulent claims by an owner of an intent to occupy a dwelling; instead, the owner rents out the subject unit.
Undoubtedly there will be a rush of applications to beat the April 19th deadline. We expect a surge of calls and hopefully we’ll be able to meet the demand provided that lenders do not adopt the new rules early (prior to April 19th) as history has shown with the 40 year and zero down abolishment.
The good news is that the government says “Exceptions would be allowed after April 19th where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.”
We think the above rule changes are somewhat conservative in that the minimum purchase down payment requirement has not changed nor has the maximum amortization of 35 years (yet!). We’ll just have to wait and see what this does to our crazy Vancouver market. Our realtor referral sources are reporting constant multiple offer situation that are still driving prices above asking. Take a look at the most recent market report from our friends at Macdonald Realty.
Mike Averbach, AMP
Mortgage Planner
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February 2010 Market Update