The rumours about a possible change in the mortgage rules in Canada have been floating about since December of last year, but today the Government finally made its announcement.
“Canada’s housing market is healthy, stable and supported by our country’s solid economic fundamentals,” said Finance Minister Flaherty. “However, a key lesson of the global financial crisis is that early policy action can help prevent negative trends from developing.”
The Government has therefore decided to adjust the rules for government-backed insured mortgages as follows:
- Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
- Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes.
- Require a minimum down payment of 20% for government-backed mortgage insurance on small (i.e., 1- to 4-unit) non-owner-occupied residential rental properties. Borrowers purchasing owner-occupied residential properties which also include some rental units (e.g., borrowers purchasing a duplex to live in one unit and rent out the other) will still be able to access government-backed mortgage insurance with a 5 per cent down payment.
These adjustments to the mortgage insurance guarantee framework are intended to come into force on April 19, 2010. Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.
Earlier today Rob Carrick of The Globe and Mail wrote that most home buyers will not be terribly affected by the changes. He’s right. Given that most lenders were already using the 3 year rate to qualify clients, moving to the 5 year will only influence those who were barely able to afford a mortgage before the changes were made.
The people who will be significantly affected will be real estate investors. The option of a low downpayment (as low as 5%) is no longer available. As of April 19, the minimum down will be 20%. Also, don’t be surprised if we see some changes to the way rental income in calculating debt-service ratios. Overall it just became much more difficult to become a real-estate investor in Canada.
Now there are other options available for determined investors. Certain private lenders will allow rental property purchases with only 15% down. Second mortgages are also available. However, both these options typically come with higher interest rates and lending fees. We’ll be highlighting some of these alternatives on our blog at OttawaMortgageSolutions.com, so check back often for updates.
Have any questions or comments about these changes? Feel free to get in touch by sending a note to d.bandoro@OttawaMortgageSolutions.com. You can also follow me on Twitter.