As we reported last week, the speculation about possible Mortgage Rules changing has become a reality…. the Federal government is going ahead with changes in Mortgage lending policies…..and these will come into effect April 19, 2010. Here are the 3 changes as reported on CBC.ca:
- all borrowers will now have to qualify using a 5 year fixed rate even if they choose a shorter term or a variable rate mortgage. (3 years fixed was the standard qualifying rates)
- refinancing your mortgage is now capped at 90% of the value of the home instead of 95%.
- investment properties will now require a 20% down payment instead of the current 5% down.
This last change will probably have the greatest impact in my opinion… It’s designed to discourage buying condos and houses for speculation purposes. However, ask anyone how their RRSPs are doing lately… the answer will probably not be good… A great many Canadians starting turning to real estate as means of buying a safe, long term investment… this could be done with as little as 5% down… but no more.
Early reaction is that these rule changes will create a small surge in house sales and then we should see a cooling off in the market…. only time will tell if these measures will have the desired effect or if they will simple force Canadians to get back into the Mutual Fund and Stock Market…. stay tuned as we follow this story..
TIGHTER MORTGAGE RULES
Too many articles this week about possible changes coming from the Minister of Finance, Jim Flaherty, on budget day March 4th. Globe and Mail and CTV.ca Where there’s smoke, there’s fire… or at least there is some serious consideration being given to changes in mortgage lending. If you’re a first time homebuyer that’s looking to buy this year, you may want to get your mortgage preapproved sooner than later… talk to your Mortgage Broker.
HIGHER HOME SALES AND HIGHER HOUSE PRICES
And how about the effect of CREA making the MLS public or more accessible? Will this affect house prices? Some think it will fuel house price increases…. Read this article from the Financial Post.
Here’s an article from The Star that shouts out ‘home sales skyrocket 87%’. Wow, that’s a scary number…And here’s another article from The Star that paints a clearer picture… ‘Some encouraging news and numbers’ they say…it can be confusing … but here’s an article with a good graph from The Financial Post .. look at the figures.. we are still below pre-recession figures… January 2010 sales were about the same as January 2008 sales.. maybe the market isn’t on fire, maybe it’s just active?
Last December, there was a report by CTV that the Federal Government was considering making some changes to mortgage rules if he saw evidence of a housing bubble. These included increasing the minimum down payment from 5% to 10% and shortening maximum amortizations to 30 years from 35.
Today, the Globe and Mail reported Jim Flaherty, the Minister of Finance, has no plans to tighten Canadian Mortgage Rules. He sees no evidence of a housing bubble. The article goes on to say, the Big Six Banks have been putting some pressure on the Government to tighten mortgage rules. Are you paying attention Mr. or Ms. Homeowner? This could affect the value of your home.
Anything that makes is tougher for buyer’s to qualify for a mortgage will reduce housing sales and this ultimately will affect the value of real estate. But probably the bigger and unwelcome effect is that it will make owning a home more difficult for first time homebuyers.
Let’s not forget that our government took action in October 2008 by reducing the maximum amortization to 35 years from 40. They also abolished $0 money down and brought in a 5% minimum down payment. Is more action needed at this time? I don’t think so…what troubles me a little is how the government and the Big Six banks are reportedly having secret meetings that concern mortgage rules.
Affordable housing is part of the Canadian dream. The record low interest rates were brought in as part of the stimulus plan to help us get out of the recession. We’re not completely out yet… let’s hope the government takes action that will help Canadians, not hinder their ability to own a home.
My suggestion to the government is to flex some muscle and get the banks to cap or standardize how they calculate prepayment penalties on residential mortgages. We’ve seen far too many borrower’s with job troubles that tried to benefit from the record interest rates, only to be hit with enormous prepayment penalties of $10,000, $15,000 and even $20,000. Let’s help these Canadians.
Here’s a good article from the Financial Times about Mortgage Lending in Canada…..and the lessons the U.S. can learn about prudent mortgage lending… The article points to 3 important differences between the 2 countries.
Here’s another article that points to a great study done recently by the Canadian Association of Accredited Mortgage Professionals (CAAMP). The study showed that Canadians more cautious than our American friends when it comes to taking on debt. And they chose fixed rates over variable rates in 86% of the cases…
It’s good to see that Canadians are perceived as cautious people, however, we shouldn’t assume that variable rate mortgages are a riskier proposition… there was a great study done by Professor Moshe Milevsky, in 2001, that compared fixed rates and variable rate mortgage….. in that study, Professor Milevsky concluded that variable rate mortgage borrowers were better off being in a variable rate mortgage….
The study was updated in 2008 and the findings were even better… the variable rate mortgage was a cheaper option than fixed rate in over 80% of the time. Of course, we each have different needs and risk tolerances… always seek professional advice.. speak with your mortgage broker.
It’s interesting to see all the forecasts in the media these days. Just last month we saw the bond market go up which caused Experts to forecast for an increase in fixed rates (bonds affect fixed rates, Bank of Canada rate affects variable rates). Economic recovery was going great…but then we saw some poor job creation data….. and less jobs means less cause for inflation (if inflation is lower than the bank’s target, then the Bank of Canada is unlikely to raise the Bank rate).
Looks like the recovery will be slower and take longer than expected…and this will be good news for borrowers as rates should remain low a little longer now…. maybe no increases til 2011? Financial Post