The Federal Minister of Finance, Jim Flaherty, made some comments about possible mortgage tightening policies…. see both Winnipeg Free Press, Reuters, and the Financiap Post. The govt is concerned about a possible ‘overheating’ of the housing market.
The honorable Minister just needs to wait for September’s figures to put that concern to rest. The numbers aren’t out yet, but early indications show that the housing market has definitely slowed down. Prices are flat and in some cases, have decreased.
Further tightening of Canada’s mortgage policies are not necessary in my opinion… but this does bring up an interesting situation for anyone that is refinancing their mortgage or looking to buy a house…
My advice…get your mortgage preapproved immediately….no need to chance any possible rule change….
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…
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…
BANK PRIME RATE FORECAST
The CIBC’s Senior Economist, Ben Tal, says Bank Prime rate will start to increase this summer… but only by 0.50% to 0.75% by end of the year… and then will pause in 2011 to see where the U.S. rates are headed…. click here Feb 26 2010 CIBC Forecast.
Mr. Tal thinks this is “risk move” pointing to similar Bank of Canada action in 1992 and 2002 when the Bank hiked rates only to reverse the decision a few months later…
Mr. Tal also points out that real inflation is around 1.5% and will continue to remain low into 2011.
Does this mean we should lock in our variable rate mortgages? For most of us, probably not… but if you aren’t sure, then speak with your Mortgage Broker.
NEW MORTGAGE RULES EFFECT
Mr. Tal sees the new mortgage rules having little effect on most of us. Here are his calculations…
- Increase down payment requirement for refinancing: 7%-8%
- Increase down payment requirement for non-primary residence: 2%-3%
- Increase qualifying rate on variable mortgages: 5%-6%
This is the first outlook I have seen…and it’s really not bad at all… Enjoy the weekend… and GO CANADA GO!
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..