Perhaps there is some truth to the Canadian housing bubble speculation as the Canadian government has made changes to the mortgage rules.  With interest rates at historic lows, home buyers are purchasing homes at a frantic pace.  Most with the smallest possible down payment and the longest possible amortization.  As you can imagine, a portion of these mortgages are variable rates, which could mean trouble when interest rates rise in the near future.

To help nip excessive lending in the bud, the federal government has made slight changes the mortgage lending rules.  In particular:

  1. When applying for a mortgage, qualifying payments will be based on the current 5 year fixed rate, even if the variable, or shorter term rates are lower.  I like this as it ensures that borrowers can afford higher rates should it happen.
  2. When refinancing, borrowers can only go up to 90% of their equity instead of the previous 95%.  If refinancing, I usually recommend to only borrow up to 80% of the equity as it avoids the CMHC premium anyways, so I don’t see this as a big deal.
  3. When purchasing investment properties, the minimum that CMHC will back is a 20% down payment.  This one is by far the biggest shocker of the new rules as it now makes a lot of rental properties “unaffordable” to investors.

Overall, I don’t think that the new rules are overly drastic, with the biggest change being the new investment property borrowing rule.  I’m of the opinion that the borrower should take responsibility for the amount that they borrow on a home, and it shouldn’t be blamed on others (like government) when the payments get too expensive.  Having said that, these new rules by the government should help potential homeowners determine their affordability levels should interest rates go up.

With regards to the investment properties down payment rule, it seems a bit excessive in my opinion.  Now, even if the investor finds a cash flow positive property without a 20% down payment, they will still need to come up with a substantial amount of cash.  However, if I were to buy a rental property today, I would put down at least 20% to avoid the CMHC fees regardless of the new rules.

Could they have done more?  I was expecting a reduced amortization term from 35-30 years, and perhaps an increased down payment requirement.  However, those measures would perhaps cool the real estate market too much, especially when interest rates start to rise in the near future.

What are your thoughts on the new mortgage rules?

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Alex Hung
10 years ago

Thanks for the mention about change in the new rules in mortgage. Hope all the Canadians are benefited from these changes.

Bill Cunningham
11 years ago

Someone had to make a change somewhere, so the Government decided that it would. All of the people who lost or nearly lost their house recently, in my opinion, would lead me to believe that if we didn’t make it more difficult to get a mortgage, then we would again be giving them away to everyone with a pulse and ultimately end up in the same financial/mortgage fiasco that we are still trying to get out of. I believe that these measures, albeit small ones, will hopefully make people work a little harder and longer to achieve their goal of having a home of their own.

Debt Consolidation - The Financial Power
11 years ago

The new harmonized tax will increase even more the down payment for home buyers. If we keep the 300,000 home in mind the tax now is 15,000 with the new harmonized tax that amount will be 39,000 that’s a 24,000 difference the buyer will have to pay. With the economy down and with the new harmonized tax and mortgage regulations it seems that real estate will slow down. I wonder why would the government come up with such tax and mortgage change in these difficult times. To save $500 a month for many families is totally impossible. If you brought a home with a 5% down payment that was doable but with 20% many first home buyers will have to put off their dreams of owning a home.

Kelowna Financial Advisor
11 years ago

I came across a Mortgage Broker that is publishing a book about Robbing your Bank… not literally but he is showcasing how to negociate with your bank for a better rate on your mortgage.

He has created a Facebook profile and it shares that the offical website will be launched shortly. It seems very interesting and if you are looking for a new mortgage you may want to check it out.

http://www.facebook.com/#!/pages/Kelowna-BC/Rob-Your-Bank/280943794625?ref=sgm

Lookin2Learn
11 years ago

With regards to the 20% down for investment properties, I recently listened to an interview with REIN founder Don Campbell. I think he had many good points, one in particular was his view on why the government implemented the 20% down to prevent speculative buying on preconstruction properties and property flipping, where the investor puts a small downpayment with the intent to flip the property hoping for large returns which was happening excessively and inflating market prices. These speculators and flippers are really forced to think twice about these investments now. It forces them to put their $$$ where their mouth is.

Nolan Matthias
11 years ago

As a mortgage broker I think the change on investment properties was prudent. Five years ago before the run up in housing prices and mass changes to insurance products you had to have 25% down on an investment. I don’t believe that the average consumer should be partaking in massive leverage by having a personal residence and several other properties all with only 5% down. That being said there are some sophisticated borrowers who may have been candidates for 5% down rentals, however if they are structured properly this change should not be an issue for them anyways.

This change will get a majority of the speculators who have run up market prices out of the market. This will cool the market while promoting balance.

As for my colleagues who are concerned about the impact this change will have on their clients, well, I think they are confusing concern for their clients with concern for their commission cheques.

Future Money-Bags
11 years ago

Dose anyone else think that the increase in interest rates in the next 12 months will force people to sell for less; due to not being able to afford their current mortgages any longer? I’m on a huge predicament on when is best time to buy.
I don’t want to rush into buying a condo, but I wanna get in there and be part of it! My first goal is to wait for summer to see if the olympics has a negative effect on housing affodability and the same with interest rates making an increase at the end of 2010.

The Rat
11 years ago

I think the 3rd change that’s heading our way, the one that requires at least 20% down payment for investment properties, will likely have some investors scrambling to seal some deals before this is implemented by the spring. When you factor in a property at say, 400,000, you’re looking at an extra $60,000 to cough up. That’s huge!

Leo
11 years ago

The rules are mild and supportive of this current environment.

However, I’m concerned about malleablility of these rules are and fast they can change. Now we don’t want them changing every five minutes, however, we want them to bring relative stability to the general marketplace.

The second point, refinancing, is a good change for the current situation. Slowing upward tendency and capping leverage for the overleveraged is good. But if the markets were to turn, the 5% difference will just as easily exacerbate any downturn that appears suddenly.

If markets drop significantly, many may require financing. Yet with diminished equity, will be less able to, resulting in foreclosure scenarios, leading to futher and imminent downward pressure increasing.

I just hope this sort of corollary has been considered and future considerations will mitigate such eventuality.

GrandougfromGuelph
11 years ago

It’s true that homes are less affordable right now due to the recession and job losses. However many are assuming that means housing is “overpriced”.
I contend the two are distinct, related but not the same.
Some experts are stating that prices are 20-30% too high.
You will see that the prices of new homes (which do impact resale prices) are “sticky” (i.e. builders will simply build fewer if demand slackens), but the prices will not go down! This is because the cost of a serviced lot (municpal levies), lumber, cement, bricks, and labour are NOT going to go down in price.