Posted by: MonsterMortgage.ca
The goal of these latest rule changes is to fend off the perceived over-speculation in housing from foreign buyers and to protect Canadian homeowners from over-extending themselves on the trough of mortgage debt.
The Department of Finance Canada, specifies in their technical backrounder that these new rules are in response to “effects of years of low-interest rates and changes in the way the market operates.”
The technical backgrounder elucidates further – these rules are “aimed at protecting the financial security of Canadians, supporting the long-term stability of the housing market and improving the integrity and fairness of the tax system…”
The latest rule changes are focused primarily in three areas; Mortgage Insurance (or Mortgage Default Insurance), Mortgage Qualification & Income Tax Rules.
When purchasing a home with a downpayment less than 20% of the property price, homebuyers are required to pay a premium for mortgage insurance. The mortgage insurance serves to protect your lender in the case of your default. A homeowner with less than 20% equity in their home is considered to be a “high-ratio” mortgage.
Conventional or “low-ratio” mortgages are mortgages where the homeowner has 20% or more of the down payment. “Low-ratio” mortgages are typically pooled together with other low-ratio mortgages and insured in ‘bulk’. The lender pays the insurance premiums for these bundled ‘low-ratio’ mortgages.
What’s Changed for Home Buyers?
Before the rules changes, “high-ratio” insured mortgages with terms less than five years (or variable rate products) underwent a type of stress test to see if the borrower could afford their home in the case of rising interest rates. Borrowers were tested on whether or not they could still afford their mortgage payments at the Bank of Canada’s five-year qualifying rate, which stands at 4.64% as of this writing.
Now, under the new rule changes, borrowers looking for a five-year fixed rate will also be subjected to the same pseudo stress test. As a result, homeowners who opted for the five-year (or longer) fixed rate product or those with 20%+ down payments will have to show the ability to qualify for the 4.64% qualifying rate. This ‘stress-test’ will mean that some prospective homeowners no longer qualify, even with larger down payments, and now may no longer qualify for the full mortgage amount they require.
“Low-ratio” mortgage loans will also have new requirements before being insured. Starting November 30th, these new requirements include the following notable points:
– Maximum amortization length of 25 years
– Maximum property value of $999,999.99 at the time the loan is approved
– Minimum credit score of 600 at the time the loan is approved
– A property that is to be occupied by the owner
These new requirements limit the government’s exposure to homes worth more than $1,000,000; primarily found in Canada’s largest housing markets: Vancouver and Toronto. The new rules also eliminate any CMHC exposure to investment properties and rental homes.
The most apparent change of these latest mortgage rules is that prospective home buyers will now qualify for less of a mortgage.
All things being equal, potential home buyers will either have to come up with larger down payments by saving more money, or home buyers may be forced to look for less expensive properties. In kind, we may start to see the asking prices of properties come down across the board as purchasers can afford less overall.
What is less obvious however; is that home buyers may start to look for money elsewhere to find the financing required to afford that dream home. These new rules might result in the creation of new lending or mortgage products which will likely come at higher interest rates – pushing buyers into greater debt, despite the government’s best intentions.
The new rules may also make it harder to take your mortgage business elsewhere upon your renewal. If you’re a homeowner who might not qualify for your mortgage at 4.64%, you may be forced to take what your current lender offers you at renewal – after all, they know you won’t have much choice.
As it stands, these new rules have yet to come into effect, with the announcement only yesterday. It will take some time for the banks, lenders and media to digest the pros and cons of these new rules and how they may impact you, the homeowner. Keep an eye out for further information on this matter.
If you’re coming up for renewal or if you have any questions about that home you’ve had your eye on – fill out a contact form here or give MonsterMortgage.ca a call today before these new rules come into effect.