After months of debate finance Minister Jim Flaherty announced the new mortgage rules for Canadians. Mr. Flaherty said there is no real estate bubble, but the government is being “proactive” (something that does not happen often). The intention of the new mortgage rules is to reduce the risk in the housing market, by increasing the minimum qualifications. These new mortgage rules will be effective as of April 19th, 2010, but what are these new mortgage rules and will they be effective?
New Mortgage Rules
Afford It on Five Year Fixed Rate
Regardless of what term and type of mortgage homebuyers choose they have to be able to afford it on a five year fixed mortgage rate. This means that lenders will have to calculate your debt ratio based on a five year fixed rate, even if you are choosing a shorter term.
From what I know and most mortgage brokers I have spoken too, most lender already calculate their debt ratio based on a five year fixed rate. Personally I do not see this requirement bringing any changes to the housing market, most lenders are already using the five-year fixed rate for their calculations and even if a different rate was used previously this will only increase debt ratios slightly.
Loan-Value
The second change is; lowering the maximum loan to value ratio from 95% to 90%. This means that homeowners will keep more equity in their homes, which in turn can reduce the default ratio when home prices eventually drop.
Although this will not have an impact on new homebuyers, it does reduce the risk of default for current homeowners who borrow against their homes. Homeowners are forced to keep more equity in their home thereby lowering the chances of default when home prices drop.
Rental Properties
The biggest change came on the rental properties side. The Finance Minister announced is that now rental properties will require a minimum of 20% down payment instead of the current 5% minimum down payment requirement.
This substantially increases the down payment requirement for rental properties and will shrink the rental market. I find this change a little on the extreme side, not sure if I see the need for such a drastic change.
It seems like the finance minister wanted to send out a message and the message I got is “Here are some tighter rules so now you can’t blame us if things go wrong.” I fail to see any significant benefits of these new mortgage rules.
I personally would have liked to see somewhat more rule tightening; I think the minimum down payment should have been raised from the current 5% this would eliminate many people who truly can not afford a home and hence reduce the risk in the market.
Around the Web:
Million Dollar Journey shares his thoughts on the new mortgage rules.
Canadian Capitalist also looks at the change in mortgage rules.
Canadian Mortgage Trends: The Good, The Bad and The Ugly
What are your thoughts on the new mortgage rules? Do you think these new rules will protect us from a real estate bubble? Are they too tight or should the government have done more?
Ray is an ex-financial adviser and the founder of Financial Highway. Currently working in the financial industry and working towards completing his Chartered Financial Analyst, CFA, designation.