New Mortgage Rules
April 19, 2010
Canadian borrowers and lenders have been anticipating some new mortgage rules since the Department of Finance issued their press release in February 2010. As promised, the changes to the mortgage insurance guarantee framework took effect today, April 19, 2010.
“Our Government is acting to help prevent Canadian households from getting overextended, and acting to help prevent some lenders from facilitating it,” said Finance Minister, Jim Flaherty in that press release.
The new mortgage rules target government-backed insured mortgages, making it tougher for first time home buyers as well as mortgage refinancing. In October 2008, the Government started to tighten the reigns of the Canadian housing market by fixing the maximum amortization period for new CMHC (Canada Mortgage and Housing Corporation) mortgages to 35 years – previously it was 40 years.
Residential Mortgage Financing
With current interest rates at record low levels, the Department of Finance emphasizes that it is important that Canadians borrow prudently and are able to manage their debts even if interest rates go up.
According to the Department of Finance, borrowers are now required to meet the standards for a five-year fixed rate mortgage. For example, if a borrower wants to get into a six-month variable mortgage, he can, but he’ll need to be able to qualify for the higher interest rate mortgage regardless.
The Government suggests that this new requirement of home mortgage financing will help Canadians prepare for imminently higher mortgage interest rates.
Home Mortgage Refinancing
Refinancing mortgages historically have been done for home renovation financing or to consolidate credit card debt. The thought to bundle debt into a lower interest rate is very attractive, but the Government is making this tougher for a small amount of homeowners.
Prior to today, Canadians were able to withdraw up to 95 percent of the equity of their homes during home mortgage financing. The new mortgage rule affecting government-backed mortgages will lower the maximum amount withdrawn to 90 percent of the home’s value.
Creative Mortgage Financing for Investment Mortgages
The Government now requires that those purchasing a property that will not be occupied by the owner, will require a 20 percent down payment. This still leaves the door open for creative mortgage financing options such as vendor financing, loans from family and credit cards to make up the difference.
Investment property purchased on speculation of increasing home values is always an incentive to buy, but at what cost? By increasing the down payment, these government-backed mortgages don’t have to assume as much risk.
With the busy real estate months of spring and summer just around the corner, will borrowers be adversely affected by these new mortgage rules? Or, will the average borrower meet the new requirements and continue with their mortgage refinancing or become a first time home buyer anyways?