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New rules will force borrower’s to take a 5 year fixed rate…

On April 19th, you might be forced to take a 5 year fixed rate mortgage….

There has been a lot of media talk about the new Mortgage Rules…. On April 19th, the rules for Borrower’s with less than 20% down payment will come into effect…. But let’s clarify…

There was an article in the Vancouver Sun last week that talked about an internal document that was distributed by CMHC to Mortgage Brokers…    Here is a quote from that internal document:

“Clarification on Qualifying Interest Rate

Effective April 19, 2010, the qualifying interest rate used to assess borrower eligibility will change only for loans with a loan to value ratio (LTV) greater than 80% as follows:

Fixed Rate Mortgages and Variable Rate Mortgages: For loans with a fixed rate term of less than 5 years and for all variable rate mortgages, regardless of the term, the qualifying interest rate is the greater of the benchmark rate1, and the contract interest rate.  For loans with a fixed rate term of 5 years or more, the qualifying interest rate is the contract interest rate.

Mortgages with Multiple Interest Rates (e.g. Multi-Component Mortgages): Each component must be qualified using the applicable criteria defined above.

1CMHC defines the benchmark rate as the Chartered Bank – Conventional Mortgage 5-year rate that is the most recent interest rate published by the Bank of Canada in the series V121764 as of 12:01 AM (Eastern Time) each Monday, and which can be found at:
http://www.bankofcanada.ca/en/rates/interest-look.html

Did anyone pick up on that….? Today’s best 5 year fixed rate is around 4.29%… If you take a 5 year fixed rate, then your mortgage is qualified using that rate… no problem… BUT, if you take a shorter term or a variable rate product, then you must qualify using the BANK POSTED rate which is 5.85% today.

Put another way, a $300,000 mortgage with a 25 year amortization requires an annual income of $74,000 if you selected a 5 year fixed rate or longer term….BUT what if you wanted shorter term or the popular Variable Rate product which is currently 1.75%?  …then you would need to qualify with the BANK POSTED rate of 5.85% and that would require a household income of $84,000…..

I don’t know about you, but Variable Rate mortgages are still very attractive…it’s too bad many of us won’t be able to make that choice when we buy our next home…

And the credit tightening continues….

It’s official… CMHC just announced further changes to their mortgage rules along with more details of the rule changes announced February 16.

-Qualifying mortgage rates…..up til now, borrowers were qualified on the contract rate of the mortgage or the 3 year rate ….on April 19, that will change to qualifying at the posted rate of the chartered banks …..Effectively, the govt has increased the rate without increasing the rate….quite a magic act…

Let’s think about this for one minute… we have been hearing about the devastating affect to consumers and the housing market should interest rates increase by 1.00% or more… well, the new qualifying rate is 5.39% as of today vs. 3.79% or 3.89% for a 5 year fixed contract rate….  but there’s more.. read on..

-Business for Self individuals will now have to qualify with traditional income validation if you are in business for more than 3 years… the logic is that the majority of self employed individuals can provide traditional income documents and that the business for self programs were for a small segment of the population…

This new change really leaves me scratching my head…. With 20 years experience in the Financial Services industry, I can tell you that the trend is for more Canadians to become self employed.. more contractual workers, less ‘Employees of a company’…  And one of the benefits of being self employed is that there are certain tax advantages that are not available to employees…resulting in a lower net income…

A lower net income will mean you better be able to come up with a 20% down payment because you won’t qualify under these new Mortgage rules that will be administered by CMHC…. I can only hope that the govt will be able to act just as quickly if they see the housing market slow down…

CMHC Chief Economist forecasts a rebound in 2010

Good news release ….CMHC’s Chief Economist, Bob Dugan, says new housing starts for 2010 will be around 172,250…. and 175,150 in 2011…. this is much higher than 2009’s 140,081….

The strong resale market is not expected to continue it’s record setting pace…. Existing home sales are forecast to total 486,700 in 2010 and taper off to 469,950 in 2011. But this is a good thing.. we really don’t want to see a red hot market as this always leads to a sharp decline…. slow and steady.. that’s always a better trend.

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