New Mortgage Rules Will Take Place April 19th – 3 MAIN Changes to the Canadian Mortgage Lending Rules – A Message from Peter Kinch Mortgage Team & Invis Mortgage Specialists
New Canadian Mortgage Rules: Major Impact or Much Ado About Nothing?
A great article published by Peter Kinch Mortgage Team regarding the new Canadian mortgage rule changes to take place April 19th, 2010. If you haven’t heard, the Canadian mortgage lending rule changes have been approved and will be implemented by major banks between now (earlier) to April 19th. Please read the following article from Peter Kinch Mortgage Team published in their February 2010 newsletter. It will talk about the 3 major changes to the Canadian mortgage rules just announced. A quick summary of the 3 Canadian mortgage rule changes include: 1 – You must qualify for 5 year rates even if you are going for a shorter term mortgage. 2 – You can only refinance your home up to 90% (from 95%). 3 – Non principal residences will require at least 20% down payment. Here is a CTV News Channel video of Peter Kinch talking about the new Canadian mortgage rules:
Canadian Mortgage Rule Change #1 – Any borrower who chooses a short-term mortgage (1 – 3 years or a VRM) must now qualify at the 5 year rate in order to get a CMHC insured mortgage.
Result: Negligible. The fact is that most lenders already require that anyone taking a variable rate mortgage must qualify at the ‘3 year posted rate’ even today before the Canadian mortgage rule changes for lending practises. What’s of interest is that the Canadian government announcement did not distinguish whether the 5 year rate is a a ‘posted rate’ or ‘discounted rate’ according to this new mortgage rule for Canadian bank lending. The difference between the posted and discounted variable Canadian mortgage rates can be about 1.5% or even more in some extreme cases. The irony is that the current 3 year posted rate is higher than the 5 year discounted rate, so if the government rule requires that you qualify at the 5 year discounted rate for this rule change #1 to the Canadian mortgage lending rules, this could actually serve to ‘relax’ the rule not strengthen it. In addition to that, recent surveys indicate that as much as 70%of Canadians already choose fix rate long-term mortgages versus less than 20% opt for the Canadian variable rate mortgage (the rest having blended rates).
Bottom Line from Peter Kinch Mortgage Team: Great move regardless by the Canadian Mortgage Rule Change #1. It is practical and imperative that any Canadian homebuyer taking a variable rate mortgage today factor in a 3% increase in rates over the next 2 to 3 years. Peter Kinch still believes there are huge savings to be had if you take a variable rate mortgages today, but only if you increase your current payments to match the current discounted 5 year rate. In dong so, you will accomplish two things: Firstly, you will accelerate the rate at which you pay off your mortgage principal, thus reducing your principal mortgage balance at the time of renewal. This will help to negate the impact of an increase in rates at that time, thereby neglecting any problems with the newly imposed Canadian mortgage rule change #1 that any borrower who chooses a short-term mortgage (1 – 3 years or a VRM) must now qualify at the 5 year rate in order to get a CMHC insured mortgage. Secondly, by budgeting and paying for the 5 year rate, homebuyers will adjust their family budget today to the inevitable higher rates in the future – thus avoiding ‘payment shock’ to your budget. Smart and prudent – but will it achieve the effect of helping to cool off the housing market and slow things down? Not at all – this one is purely optics. Therefore, the first Canadian mortgage rule change to be implemented by April 19th, 2010 is: Any borrower who chooses a short-term mortgage (1 – 3 years or a VRM) must now qualify at the 5 year rate in order to get a CMHC insured mortgage.
Canadian Mortgage Rule Change #2 – The maximum amount you can refinance your home has been lowered from 95% to 90%.
Result: Again this one is negligible. Smart move by the Canadian government to make mandatory what should be common sense when refinancing and borrowing from our own home or investment property. The only reason anyone would leverage their residence up to 95% would be to pay off high interest credit card debt with the extremely low interest mortgage debt. So by lowering the maximum amount you can refinance your home from 95% to 90%, this mainly reduces the number of high-risk individuals and homeowners who are already borrowing too much and are in too much debt. Others may want to simply access as much money as they can at these historically low rates in hopes of generating a greater return in the Canadian real estate market. Either way, it is extremely imprudent for anyone to over leverage their principal residence. Whether there is a bubble or not, it certainly doesn’t take much of a market correction to eliminate 5% in the value of any home. For the average Canadian, their home represents their greatest Canadian real estate investment and with that, their largest source of net worth. It also represents a major component of the average Canadians’ retirement plan. It should be a source of ‘equity development’ and not be used as an ATM to subsidize current lifestyle. So this rule change #2 to the Canadian mortgage lending practices is a good one: The maximum amount you can refinance your home has been lowered from 95% to 90%.
Bottom Line from Peter Kinch Mortgage Team: Smart and Prudent move for the lowering of the maximum amount you can refinance your home from 95% to 90%. Will it have the desired effect of slowing down the housing market? Not at all. The truth is that the percentage of Canadians home refinancing to that extent is an extremely small percentage of the population so this will have a very small impact. So thumbs up to the new Canadian mortgage rule #2: The maximum amount you can refinance your home has been lowered from 95% to 90%.
Canadian Mortgage Rule Change #3 – The minimum down payment on non-owner occupied properties purchased for speculation will now be 20%.
Result: Significant! This is by far the most significant of the new rule changes. The Canadian mortgage lending practice change is: The minimum down payment on non-owner occupied properties purchased for speculation will now be 20%. Although the announcement specifically stated that they were targeting the ‘speculator’ not the Canadian real estate ‘investor’, the net effect is that ALL investors will be impacted. However – and this is VERY important. The impact will not be the fact that investors must now put 20% down. The truth is, I’ve been teaching that for years. Any Canadian real estate investor should look to put 20% down for cash flow reasons if nothing else. But the real reason this is a major rule change is the sub-text to this rule change that was not included in the original announcement and not reported in the press. In addition to no longer allowing high ratio mortgages, CMHC has also changed their underwriting policy. Whereas they previously allowed for an 80% offset of an investors existing portfolio when underwriting a mortgage, they will now revert to a 50% add-back mortgage. Now to the average Canadian this is a meaningless change. But to the real estate investor, the change is significant. It will create 3 major changes:
Here are the issues for Canadian real estate investors with the Canadian mortgage rule change #3, The minimum down payment on non-owner occupied properties purchased for speculation will now be 20%. Canadian mortgage with 50% add-back is significantly less favourable to an investor than an 80% offset. Without going into an elaborate explanation of the difference between the two, let me make it simple: if you currently own more than three rental properties, you will never be able to qualify for a mortgage using only 50% of the rental income from your portfolio. No problem you say – I’ll just put 20% down. Well the secondary issue here is that all the non-institutional lenders such as Merix, Street Capital and DLC Mortgages, are MBS lenders and require that all the mortgages in their portfolio be insured – even if they are conventional (20% down). That means they need to follow the CMHC guidelines. This means those lenders are no longer an option for real estate investors with 3 or more properties even with 20% down payment. This will shift more of this business to the chartered banks, all of which are tightening their guidelines on rental properties meaning the next issue investors will face is ‘Cap space’. You will have a cap on how many Canadian mortgages you can get with each bank and you now have fewer choices. This will make the need to have a strategic plan even greater because of the Canadian mortgage rule change #3, The minimum down payment on non-owner occupied properties purchased for speculation will now be 20%.
Bottom Line: Significant impact on investors. But as for cooling down the overall Canadian real estate market – again negligible, simply because Canadian real estate investors at the end of the day represent less than 5% of the overall market so their impact on the overall housing market in Canada is muted. At the end of the day, the finance minister walked a thin line between addressing concerns about an over-heated real estate market in Canada and not over-correcting the problem at the risk of causing damage to the overall economy. I think he went too far with the changes to the investment side with the new Canada mortgage rules and lending practices, but otherwise I give him full marks. By addressing these concerns now, it should also take pressure off Mark Carney and the Bank of Canada to raise rates prematurely and that is in the best interest of our overall economy. But like I said in January – it’s the government we’re talking about – anything can happen.
From Invis Mortgage Specialists – New Canada mortgage rules to take effect April 19
On February 16, Finance Minister Jim Flaherty announced new Canada mortgage rules intended to help ensure homebuyers can handle their debt load when interest rates rise, as well as to slow down Canadian real estate speculation. “There’s no clear evidence of a housing bubble, but we’re taking proactive, prudent and cautious steps today to help prevent one. Our government is acting to help prevent Canadian households from getting overextended, and acting to help prevent some lenders from facilitating it,” commented Minister Flaherty. The new Canada mortgage rules changes take effect April 19, 2010, but may be implemented earlier by the major banks and other Canadian lenders. Here is a quick look at the changes, which apply to government-backed insured mortgages:
Canada Mortgage Rule Change 1: Borrowers must now qualify based on a five-year fixed rate even if they choose a mortgage with a lower interest rate and shorter term according to the first rule change for Canadian mortgage lending practices. The government’s rationale for this change is that it will help borrowers prepare for higher rates, although it may squeeze the purchasing power of home buyers. It remains unclear whether borrowers must qualify at the five-year posted rate or the five-year discounted rate.
Canada Mortgage Rule Change 2: The maximum amount Canadians can withdraw in refinancing their mortgages will be reduced to 90 per cent of the value of their homes, instead of 95 per cent according to this new Canada mortgage rule. The government’s rationale for this change is that it will help ensure home ownership is a more effective way to save. The impact of this change is expected to be minimal as relatively few homeowners withdraw equity from their homes to this extent.
Canada Mortgage Rule Change 3: A minimum down payment of 20 per cent will be needed for government-backed mortgage insurance on non-owner-occupied properties “purchased for speculation,” which realistically means rental properties according to this new mortgage rule that really puts a damper on both speculative and seasoned real estate investors alike. While this measure is intended to hamper the speculative buying of properties by reducing the leverage of buyers, it will also impact those buying real estate for general property investment purposes.
Be sure to talk to an Invis mortgage professional about how these changes could affect you and for advice on the mortgage strategy that fits your needs.
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