Mortgage Brief.. Mortgages rules explained… and why didn’t the govt consult experts?

Bill Morneautrudeau

They say we don’t read emails or articles anymore.. we just skim through them.   But some things can’t be understood with a quick glance.  The new mortgage rules will impact EVERYONE!

If you want to understand how they impact you, continue reading… If you don’t care or want to be oblivious, take the blue pill and move on.

I’ve put together a list of the mortgage rules so that you can understand what they mean and how they will impact you.   Hey, let’s give The Federal govt some credit… they’ve been transparent about a few things, right?:

  • They want house prices to drop.
  • They don’t want anyone to have a mortgage if their home is worth more than $1,000,000.
  • They don’t want you to ever refinance your mortgage.  You should only require a mortgage when you buy a house.
  • They don’t want you to buy a house and rent it out.  You should only buy a rental property if it has 2 or more units.
  • Mortgages should not be amortized for longer than 25 years.
  • They want rates to go way up.

Here we go.. Forget the data and stats being reported today.  Those stats don’t matter!  We want to see the stats after March 30th, 2017.

Remember the mortgage rule changes of October 17th?  How about the ones on November 30th?  Get ready, we won’t see the full effect of these changes until after March 30th 2017.

That’s when the last of the mortgage approvals will have closed, that were done under the old rules. And all the new mortgage closings beyond this date, will have had to been qualified with the new rules.  This is when we’ll begin to see the impact of these rules… And we’ll begin to see just how many Canadians will be have been impacted.

If you think I’m wrong, read the rule changes below and tell me what other conclusions you can come up with.

RULE CHANGES

  1. “Stress-test” for hi-ratio mortgages.  Borrowers buying with less than 20% down must qualify at the 5 yr posted Fixed rate, currently 4.64%. (this rule has received the most media attention, but this won’t impact that many as several lenders have been using this already).
  2. “Stress-test for low-ratio mortgages.  Pay ATTENTION. This rule affects far more Canadians than just first time homebuyers..  Lenders, Banks, etc have been getting portfolio insurance on mortgages for over a decade… invisible, and at no cost to the client. It allows Lenders to raise money more cheaply, and the end result is lower rates for Canadians. But now, Lenders must put these lower risk mortgages through the same ‘stress-test’.  (make sense?  of course not!).    Here’s the details…
  • Purchases and mortgage transfers only.  NO REFINANCES allowed.  (Yup.. that’s right.  Refinancing your mortgage is a bad thing, all of a sudden.)
  • 25 year amortization maximum.
  • Purchase price must be below $1,000,000.  If  you are buying for more than this amount, and you want even a small mortgage of $100,000 or $200,000, you are going to find many Lenders will increase the interest rate or not offer anything at all. (you are reading this correctly…don’t worry.  This is correct.  This is how idiotic the new rules are).
  • Minimum credit score of 600. (not a big deal as most of us have much higher scores).
  • Maximum debt servicing ratios of 39% of your gross income to be used for housing costs (while this may sound ok for most, there are many circumstances where a client has reduced income, temporarily, of is on a pension with lots of equity in the home and just wants to borrow enough to get by for the next 5 or 10 years..  why can’t we allow them to access this money if the Lenders are willing to lend it?   Again, this makes no sense and shows how little thought was put into these rules.)
  • No rental property mortgages allowed for single family homes.  Yup, you read this right.   For some unknown reason, the Govt decided that single family homes shouldn’t be rented out and therefore, not qualify for a mortgage.  (this has to be the dumbest rule of them all.  How many Canadians own a rental property or want to own a rental property?  Why does the property have to have 2 units or more to qualify?   Somebody pinch me, I’m having a nightmare.!!!)

THE REAL WORLD…INSIDE MORTGAGE APPROVAL CENTRES

End result has been chaos since October as Lenders are unclear on how and what the new rules actually mean and how they are to be implemented fully .   Qualifying at Bank Posted 5 yr fixed rates isn’t a huge deal as most Canadians qualified on this anyway.  The bigger changes are with regards to rental properties, maximum mortgage amounts, limitations based on purchase price, no refinances.. these are bigger issues that will impact all of us.

MORNEAU… Our Finance Minister talked with the Canadian Mortgage Brokers Association (CMBA) on October 14, 2016… only AFTER they announced the changes.   I repeat, AFTER the changes were announced.  When asked why CMBA was not consulted, Mr. Morneau just replied that the governments concern for consumer debt load was the reason for quick implementation.  Wow, really, that’s it?   I’ll repeat, Morneau consulted the CMBA just 3 days prior to the rules coming into effect!!  Why bother meeting then?  What a farce.

FUTURE RULES

Yes, there are even more rule changes proposed..

  • LENDER RISK SHARING.. CMHC insures around $500billion in mortgages.  Any default by the borrower and loss to the lender, would be payable by CMHC.  In theory, the govt is on the hook for any potential losses.  However, Experts agree, that any real loss to the tax payer could only result from a very large drop in real estate values.  Something we haven’t seen since 1990, and something that isn’t expected to happen.. Even by the most pessimistic.
  • INCOME TAX MEASURES… New rules would remove a loophole where a non-resident could own a Canadian home, and sell the home Capital Gains tax-free.  Canadians enjoy being able to claim appreciation in their homes without tax (how often can you say that?)

Here’s another interesting forecast.  The Canadian Real Estate Association (CREA) is forecasting for sales to rise by 6.2%.  Stay tuned.. if this forecast is accurate, we will see more real estate and mortgage transactions… but tougher mortgage underwriting.   Do yourself a favour and speak with an experience Mortgage Broker.   Don’t rely on a robot or ‘do it yourself’ mortgage system to guide you.   Mortgages have become far more complex than ever before.  They continue to evolve.  An advisor can help you make the right decision.  They won’t tell you what to do, but they can spell out your options and give you unbiased, neutral advice.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

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