New Mortgage Rules for Real Estate Investment in Canada

by Benjamin Bach on 16. Feb, 2010 in Featured Post, Real Estate Investment

My wife and I are in the Carribean this week doing some research, so posting has been light. However, I want to pass along a few articles my friend Jeff Zabel, with Mortgage Alliance in Kitchener Waterloo emailed to me. They are about changes to the mortgage rules, and will affect real estate investors:

This morning Finance Minister Jim Flaherty made the following three announcements to mortgage insurance rules

1. Variable mortgages qualified at five year fixed rate;

2. Refinancing limited to 90% instead of 95%;

3. Non owner occupied residences [I read this as single family properties bought for rental purposes -BB] require 20% down payment;

This announcement is the result of a review process on debt levels undertaken by the federal government that CAAMP has been actively engaged. We released Will Dunning’s debt report, consulted with members and took a position with decision makers in Ottawa that while we opposed changes to the current 5% down payment rule and 30 35 year amortization rates for primary residences, we were open to other changes if the government deemed there to be a problem. The changes announced this morning reflect CAAMP’s position and do not affect primary mortgages except for the first point where many lenders are already qualifying at 5 years anyway.

Jeff is being told that these rules will be effective april 19th, 2010, so we may be able to still take advantage of the current terms and rates if you’d like. Contact me for more information regarding that.

Jeff also sent me this article from the Canadian Press, which came out before the initial announcement, so it contains speculation, not fact:

New mortgage rules introduced to lessen mortgage crunch risks: sources say

By Julian Beltrame, The Canadian Press

OTTAWA – The federal government is expected to announce new rules Tuesday that would make it more difficult for first-time buyers to enter Canada’s hot housing market.

Sources have told The Canadian Press that Finance Minister Jim Flaherty is ready to move on the issue because of concern Canadians may be taking on too much debt.

Economists have advised the minister the best way to protect Canadians is to institute a debt affordability test in order to qualify for a Canadian Mortgage and Housing Corp. insured mortgage.

Currently, prospective home owners can qualify for a CMHC insured mortgage if they put at least five per cent down on the cost of a home.

But bank officials say they usually apply a cushion to ensure home buyers have sufficient income to meet payment requirements if floating rates rise, in some cases by more than two percentage points.

Flaherty is expected to make such an income test a condition for acquiring an CMHC insured mortgage.

Another possibility is for the minister to reduce the amortization period from 35 years to 30, which would have the effect of raising monthly payments. [note: it does not appear this happened -BB]

It is believed Flaherty rejected more radical measures to cool the housing market, which has reached record levels in sales and near record levels in average home prices despite the weak economy.

Economists have cautioned the minister against putting on the brakes too strongly. They say raising the minimum downpayment requirement to 10 per cent, one of the suggestions given the minister, could cause a crash in a key mainstay of the fragile economic recovery.

The Bank of Canada has been warning for months that homeowners should ensure they can absorb an increase in their floating rate mortgages once rates start rising, likely as early as this summer.

By the central bank’s own stress test calculation, almost one in 10 households would have a debt-service ratio that makes them vulnerable to economic shocks by the middle of 2012 if current trend continue.

In an address written for deputy governor Timothy Lane last month, the bank suggested the government has all the tools it needs to address the problem.

"An array of supervisory and regulatory instruments can be used by the government to restrain a buildup of systemic risks," said notes the address.