As expected Jim Flaherty announced new mortgage rules this morning. They were not the changes to amortization and down payment that everyone feared.
The changes seem to have been well thought out, changing the down payment required on rental properties, the loan to value one can refinance to, and the qualifying rate for adjustable rate mortgages.
I think Flaherty did a great job in assessing the products that needed to be eliminated from the insurer package. I have long believed that if you could not afford to put 20% down on a revenue property, you could not afford to own one. See the changes below.
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From Reuters
NEW RULES
* Borrowers must qualify for a five-year fixed-rate mortgage, even if they opt for a lower variable rate. Banks and insurers typically assess the borrower’s gross debt service ratio — the cost of financing their home relative to their income — and their total debt service, which includes total debt payments relative to income. Currently, they use either the fixed-rate, or the greater of the variable rate and the prevailing three-year fixed rate.
* Lower the maximum amount a homeowner can withdraw when refinancing a mortgage to 90 percent from 95 percent of the value of the property. The government wants to encourage home ownership as a savings tool so is limiting this type of financing, which allows borrowers to lower their equity in their home.
* Increase the required down payment to 20 percent from 5 percent for insured mortgages obtained for purchasing speculative housing investments not occupied by the owner. Borrowers buying a property they intend to live in that also includes rental units will not be subject to the 20 percent rule.
* The rules that did not change, despite some speculation they might, were the maximum 35-year amortization period and minimum down payment of 5 percent for regular home buyers who plan to live on their properties.
MORTGAGE INDUSTRY
* Innovation began in Canada’s mortgage industry in 2006, including longer amortization periods and higher loan-to-value ratios. Although the number of high-risk, or subprime, mortgages remains low relative to the United States, Ottawa intervened for the first time in 2008 to tighten mortgage insurance rules.
* Canadian law requires banks to obtain mortgage insurance on loans where home buyers make down payments of less than 20 per cent, which are considered high risk. The borrower generally pays for the mortgage premium, which is added to the mortgage payments.
* Most mortgage insurance is provided by the state housing agency, Canada Mortgage and Housing Corp, and is backed by the government. The government also backs private mortgage insurers’ obligations to lenders, subject to a deductible. (Reporting by Louise Egan, editing by Peter Galloway)
