Finance Minister Jim Flaherty has announced three
new mortgage rules saying the government is taking
“proactive, prudent and cautious steps” to prevent a
housing bubble. Well, there’s probably no reason for
alarm: these new mortgage rules won’t affect most
homeowners or buyers.
The gist of the new rules is that it won’t be as easy to
teeter at the top of your lending limit; the government
thinks homeowners should have a bit of equity hedge
and a realistic expectation of what they can pay each
month. Most Canadian homebuyers are already managing
their mortgages according to these standards anyway,
although some new and very leveraged buyers could be
affected. Real estate investors and speculators may notice
these rules the most, which take affect April 19, 2010.
Here’s the quick rundown on what’s new:
Think five-year, fixed-rate. Whatever kind of mortgage
you eventually decide on, the new rules say that you must
qualify for a standard five-year, fixed-rate mortgage. What
you choose, of course, is up to you and your mortgage
planner; you may opt for a shorter term and /or a lower
rate. While the government has said this test will help
homebuyers prepare for higher rates, most lenders
were already qualifying homeowners on the three-year
fixed rate. As a result this shouldn’t affect too many
homebuyers. Buyers who don’t qualify for the five-year,
fixed rate will need to downsize their expectations on
how much home they can afford. Based on a 5%
downpayment, 35-year amortization, and a home price
of $300,000, a buyer would need about $7,400 more in
annual income to qualify under the posted five-year fixed
rate versus the three-year rate.
Protect at least 10% of your equity. Refinancing your
home to pay down high-interest debt is still a smart
strategy to save interest in the long term. There are
common sense limits to using your home as a piggy
bank, of course, and now the new rules dictate that you
must protect at least 10% of your equity, up from 5%.
Where this could cause a problem is with those who are
overextended on high-interest debt. They may no longer
be able to payout all of these debts and get on a sounder
financial footing with a lower payment and less interest
costs. Depending on their reasons for having a high debt
load these clients may end up in a bad credit situation
or bankrupt. While the mortgage planners at Mortgage
Architects have been offering credit and debt counselling
to their clients for years, more people may now be in
need of this service.
You need 20% down on an investment property. This
is a change that primarily affects investors. If you’re not
personally living in a property that you own – such as a
second home or a rental property – you will now need a
minimum downpayment of 20%, up from 5%. Investors
used the 5% rule to leverage their mortgage for tax
purposes: so they could write off more interest against
their rental income. This could slow speculative real
estate purchases, for instance buying new properties with
the intention of flipping them later, which is common in
the condominium market.
While we are looking at rising rates in the future, the
housing market remains healthy. These upcoming changes
are unlikely to affect the majority of Canadians, although
there could be a flurry of activity before April 19 – as
homebuyers take advantage of the last few weeks of the
existing rules by moving up purchases and refinances.
If you think the new rules could affect you, call an
experienced mortgage planner right away.
