How The New Mortgage Rules Will Affect Your Mortgage

Ministry of Finance has introduced new mortgage lending rules to prevent the creation of housing bubble similar to the one in the United States. Here are the new rules (which affect insured mortgage only, less than 20% downpayment):

1. Effective April 9th: Self employed will require 10% to purchase a home (from 5% currently) and can refinance up to 85% of home value (from 90% currently)
2. Effective April 9th: Commissioned applicants will not be considered under the self employed program. They have to show their income
3. Effective April 19th: Canadians will be able to refinance their homes up to 90% of the current market value (from 95% currently)
4. Effective April 19th: Investment (rental properties) will require 20% downpayment. Cottages or second homes, as long as the owner can prove they plan to occupy the property temporarily will not require the 20% downpayment.
5. Effective April 19th: For all variable mortgages, regardless of term, and for all fixed mortgages less than 5 year term will use the higher of the contract rate or posted rate to qualify.

My Comments & Personal Opinion

The first 3 points are prudent moves by the ministry of finance and I don’t believe they’ll impact many Canadians.

With respect to the rental property rule, the increase from 5% to 20% downpayment is an excessive change. Other possible alternatives could have been stricter qualification guidelines and limiting the number of insured rental properties for each client. The new rule is designed to stop the speculators who line up outside sales offices attempting to purchase multiple condos in major Canadian cities for the purpose of flipping them, but unfortunately affect the prudent real estate investors who invest for the purpose of building a real estate portfolio and acquire positive cash flow properties. I foresee more joint ventures and partnerships in purchasing investment properties.

The last rule will have the most impact on Canadian homeowners. As the posted fixed rate (currently 5.24%) increases to 7-8% as the economy improves over the next few years, mortgage qualifications for variable mortgages and fixed rates (less than 5 year term) will become more difficult. I believe this rule will result in more 5 year fixed term products in the future since it will more difficult to qualify for a variable mortgage.

My Recommendations

1. Rental property owners: pay down the mortgage to get the mortgage balance to 80% of rental property value at time of renewal to avoid having to renew with existing lender at higher rates.
2. Homeowners: Today’s rates (fixed & variable) are at an all time low. This is a great time to take advantage by increasing the payments frequency and amounts which will make a big difference at renewal time. Utilizing the pre-payment privileges at various times throughout the year will make a big difference as well.