New Mortgage Rules Explained

New Mortgage Rules:

On April 19 our government announced three major rule changes to “prevent” a housing-price bubble and keep homeowners from getting “overextended.”
These new rules apply to government-backed insured mortgages only.

5-Year Fixed Qualification Rates
• The New Rule: Borrowers will need to qualify using a 5-year fixed rate regardless of what term they choose. If you want a 1.95% variable rate, for example, you will need to show that you can afford payments at a higher fixed rate, like 6.10%.

• The Government’s Reasoning: “This initiative will help Canadians prepare for higher interest rates in the future.”

• The Effect: It will now be harder to qualify for a variable-rate mortgage, but not much harder. Most lenders used the three-year mortgage rate to calculate a borrower’s debt service ratios. This means the qualifying rate will go from something like 4.90% to 6.10%.
• The Verdict: A sound and necessary change - although many lenders already use similar guidelines.

90% Maximum Refinancing

• The New Rule: No longer will you be able to refinance your home to 95% of its value. 90% will be the new refinance maximum.
• The Government’s Reasoning: “This will help ensure home ownership is a more effective way to save.”

• The Effect: Borrowers will be less able to pay off high-interest debt with lower-cost mortgage money. On the upside, this rule has the positive effect of keeping equity in the home (which is quite helpful when home prices fall). It also discourages homeowners from relying on home equity to bail themselves out when they accumulate debt.
• The Verdict: It will be more difficult for people who need to restructure debt in an effort to pay more principal and less interest. On the other hand, a 90% refinance limit is beneficial in that it deters people from racking up debt and using their homes as a proverbial ATM machine.

80% Maximum Insured Financing On Rentals

• The New Rule: People buying non-owner occupied rental properties will need to put down 20% to get an insured mortgage, versus 5% previously.

• The Government’s Reasoning: To reduce speculation.

• The Effect: The number of investors creating rental housing will drop notably. Investors will need to borrow down payment funds elsewhere (assuming it’s allowed) or use higher-cost non-insured lenders (like TDFS) to get 90% financing. Note: This rule does not apply to multi-unit owner-occupied homes with rental units (like duplexes and triplexes).

• The Verdict: The government went from allowing 100% rental financing to 80%. The solution will have an effect on the rental stock in Canada. Will it cause a material rise in rents? That’s a tough call, but it will definitely reduce the supply of rental units and limit Canadians’ investment options.