As was expected last week, Jim Flaherty has unveiled some new mortgage rules to help counter the fears that Canada may be experiencing a housing bubble.
Image: John Talbot / Flickr
The rules do not change the basics of mortgage lending very much: consumers still have to produce 5% of the property’s cost for the down payment, and the amortization period cannot be longer than 35 years.
However, for those consumers who are getting a variable rate mortgage, they will have to prove they can pay for a five-year fixed rate mortgage as well. The variable interest rate currently stands at about 2% – 2.5%, and the fixed rate sits at 5.39% for most of the big banks. The borrowers do not have to pay the fixed rate payments – they just have to show they can if they need to. This generally means that the banks won’t lend to you if your debt payments exceed 42%-44% of your monthly income.
How will this affect the property market? It will likely not have much of a huge effect. In 2009, 86% of all mortgages were fixed rate mortgages, and of those 70% were five-year fixed rate mortgages. So, the majority of borrowers are already following the rules. Since many experts felt that we weren’t experiencing a housing bubble anyway, the rules change wasn’t going to affect the market much. It will just help ensure that a bubble doesn’t occur.
Another major change is that the down payment required for investment properties has been bumped up from 5% to 20% to qualify for mortgage insurance. This may seem like a huge bump, but most investors were already hitting the 20% benchmark before the rules change anyway.
The final change – and the one that might directly affect you the most is the ceiling on refinancing your mortgage. Previously, if you wanted to fold some of your credit card debt into your mortgage, you could refinance your mortgage to 95% of your home’s value. This has been lowered to 90%. Since mortgage rates are much lower than credit card rates, this is actually making it more difficult for some borrowers to save money.
The bottom line is that these rules changes are just tweaks, and will not cause major changes in the market. If you are planning on buying or selling this year, you are likely already set up so that none of them will have any effect on you.
Heleen Jacobsen
Broker of Record with InfoMarket Group GMAC Real Estate
www.infomarketgroup.com
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