New Canadian Mortgage Rules

Wow – a very exciting morning to say the least. The mortgage and housing industries are abuzz with news from Finance Minister Jim Flaherty about new mortgage rules in Canada.

As a quick summary, here are the new rules:

1. First-time buyers need to pass a new qualification test: can you afford this home at the 5-year fixed rate?

The basic premise here is that some first-time buyers choose a variable or adjustable interest rate which floats, or a shorter term fixed rate that will need to be reset once the term is up. The danger there is for first-time buyers who barely qualify at today’s extremely low rates. If and when rates go up these same buyers may not qualify or find it affordable, which could create a wave of problems for the economy.

2. Maximum refinancing to 90% of the value – down from 95%.

This move is designed to help people avoid over-leveraging their property. When values of homes are going up this is usually an afterthought, but as we’ve all seen now, values can go down too – sometimes substantially. If you borrow too much against the value of your home and prices go down, you could end up “under water” and unable to sell or move.

3. Minimum down payment for rental properties goes up to 20% from 5%. This is, in my mind, the most significant and most welcome of the changes. As a brokerage we’re often inundated with property “investors” who just went to seminar about how to get rich quick in real estate. They often want to buy as many homes as they can with as little down as they can. This is a recipe for a housing bubble and the single largest source of foreclosures.

I’ll try to provide more analysis as the day goes on and I’ve had time to digest the main changes. In the meantime I’ve posted a link to the Financial Post’s analysis.

Financial Post summary of new mortgage rules

Update

You can read the official Canadian Government Department of Finance Backgrounder here

The Globe and Mail has some commentary on why the new mortgage rules won’t hurt homebuyers and I happen to agree with them.

As more and more information comes out about these changes, I find I’m more pleased with the moves. Rampant speculation will hopefully get nipped in the bud and these “get rich quick” scheme real estate seminars and clubs that are so popular will hopefully go out of business.

Most first-time buyers won’t have any issues with the changes and it won’t affect the advice they’ll be getting – at least from our brokerage. One possible downside will be for people who desperately need to refinance in order to consolidate debt and go beyond that 90% loan-to-value mark. Hopefully this won’t hurt people in that position too much.

Mortgagebrokernews.ca has an industry response to the new changes here