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New Mortgage Rules for Canadians





Perhaps there is some truth to the Canadian housing bubble speculation as the Canadian government has made changes to the mortgage rules.  With interest rates at historic lows, home buyers are purchasing homes at a frantic pace.  Most with the smallest possible down payment and the longest possible amortization.  As you can imagine, a portion of these mortgages are variable rates, which could mean trouble when interest rates rise in the near future.

To help nip excessive lending in the bud, the federal government has made slight changes the mortgage lending rules.  In particular:

  1. When applying for a mortgage, qualifying payments will be based on the current 5 year fixed rate, even if the variable, or shorter term rates are lower.  I like this as it ensures that borrowers can afford higher rates should it happen.
  2. When refinancing, borrowers can only go up to 90% of their equity instead of the previous 95%.  If refinancing, I usually recommend to only borrow up to 80% of the equity as it avoids the CMHC premium anyways, so I don’t see this as a big deal.
  3. When purchasing investment properties, the minimum that CMHC will back is a 20% down payment.  This one is by far the biggest shocker of the new rules as it now makes a lot of rental properties “unaffordable” to investors.

Overall, I don’t think that the new rules are overly drastic, with the biggest change being the new investment property borrowing rule.  I’m of the opinion that the borrower should take responsibility for the amount that they borrow on a home, and it shouldn’t be blamed on others (like government) when the payments get too expensive.  Having said that, these new rules by the government should help potential homeowners determine their affordability levels should interest rates go up.

With regards to the investment properties down payment rule, it seems a bit excessive in my opinion.  Now, even if the investor finds a cash flow positive property without a 20% down payment, they will still need to come up with a substantial amount of cash.  However, if I were to buy a rental property today, I would put down at least 20% to avoid the CMHC fees regardless of the new rules.

Could they have done more?  I was expecting a reduced amortization term from 35-30 years, and perhaps an increased down payment requirement.  However, those measures would perhaps cool the real estate market too much, especially when interest rates start to rise in the near future.

What are your thoughts on the new mortgage rules?





35 Comments, Comment or Ping

  1. The new rules shouldn’t really effect first time home buyers which is good. Investors however are not going to be happy.

    I didn’t really like the idea of eliminating the 30 or 35 year mortgage for those who qualify at 25 years. Some people like myself (orginally at 40 year am) like the cashflow. It will be interesting to see the feedback from industry members.

  2. Seems like we both are on the same boat with these changes. I agree with you on the rental property changes, I find them too extreme and don’t think a lot of good can come out of it.

    I like the loan to value change as it reduces borrowing capabilities and forces homeowners to keep more equity in their home reducing possible default rates in the future.

    I doubt that setting the payments on a five year fixed rate will do anything since most lenders were already doing so.

    Overall I think it was a nice attempt by the finance minister, but I don’t think these new rules will bring in any changes in the housing market. I was hoping there would be some more rule tightening, mainly increasing the minimum amount of down payment required from 5%.

  3. 3. MTNG

    Many investors want the highest cashflow with the lowest out of pocket expense. These new rules make the out of pocket expense much higher, thus deterring some potential investors. This could hurt affordable housing.

  4. 4. kevin

    I wonder if these changes will affect rental prices.

  5. 5. Ryan

    I agree with FT on the 20% for investment properties, a little bit of a shock.
    Although,I bought a commercial property about a year ago and found the bank would only lend 60% which left quite a chunk to come up with. The property is cashflow positive so it all worked out :)

    As for the rest of the changes I would agree with FT again just some common sense really. Glad to see you chose to inform us on the issue I heard bits of it on the news yesterday but didn’t catch it all, thanks for the great blog !

  6. 6. Dana

    As someone who purchases rental properties, I have seen an influx of new investors since the stock market instability of 2008. I assume that some stock-wary investors have decided to diversify into real estate.

    This has driven the price of investment property (where I live) up. Investment property trades on fundamentals and cash flow. It has been more and more difficult to find value in the market.

    I think that Flaherty and the government recognize this trend and are trying to protect the newbie investors who are jumping into the market.

    Also, if interest rates rise, most people would be more likely to walk away from a mortgage on an investment property than a mortgage on their principle resicedence so there is a higher default risk with investment property mortgages.

    As for first-time homebuyers, I would have supported an increase in minimum downpayment from 5% to 10% or a cap on amortization, but not both. After you factor in CMHC fees on a 95% LTV mortgage, there is practically no equity in a home with 5% down…not qute sub-prime territory, but dangerously close.

    @Kevin: If first time homebuyers had been forced out of the market (increased downpayment requirement or capped amortization) we may have seen higher rents and lower vacancy rates, but since that didn’t happen I expect rent and vacancy will not change.

  7. I think they should have reduce the maximum amortization to 25 years and increase the minimum cash down to 10%.

    This would have created a major slow down in the housing market for a good 2 years but it would have make people more responsible about their money I think… those new mortgage rules won’t do much to slow down the housing market besides the rule of the 5 years rate…

  8. 8. Brendan

    I have no problem with the new regulations.
    Too many people watch HGTV’s “flip this home and be a millionaire” type shows.
    I always thought banks qualified you on a 5 year rate but I guess I was wrong.
    I am against shorter amortization. I went 35 years, but I have 65% equity in the house. I like more cash-flow now with the option to pay down if I choose.

  9. 9. Sam

    These rules benefits the banks in my opinion. Now the risk of default on the loan has been reduced with these new measures. And the shocker for investors. I’m gonna rush and find myself a property before April 19th!

  10. 10. Lakedweller

    I’d like to know how much the people opposed to 5% down payments (ie. Financial Blogger) put down on their first house. Not the percentage, but the actual value. I bought my first house with 25% down in 2001, but that was only $18,000. The average price of a starter home in almost every major city in Canada is over $300,000. That means a first time buyer would have to come up with $30,000 and closing costs. That is unrealistic in this environment. If property prices stay relatively flat for the next few years, wages will catch up and 10% will be attainable. But it isn’t right now.

    The government is trying to reduce speculation in investment property. For example, in Kelowna, just before the peak, developers had sold 2000 condo units to speculators for nothing down (or near nothing). These “investors” were just riding the wave…and more than likely causing the wave.

    CMHC isn’t the only mortgage insurance show in town and real investors know how to get into investment properties with nothing down, and they will continue to do that. It is best for all of us if speculators need to “ante up” to play the market.

    And I’ve heard of investors taking a wash on selling a rental property due to interest rate increases, but I’ve never heard of defaults. Not in Canada. Not in the last 15 years.

  11. 11. Lakedweller

    I forgot to mention my most important point. When mortgage rates are as low as they are, why would I have more equity than necessary in my house. I make my minimum mortgage payment at 2.75% interest (40 year am) and use the rest of my cashflow to maximize other investment opportunities that have far greater returns. When interest rates go above 4% I will start diverting cash toward the mortgage. The current mortgage rules allow that kind of common sense to be applied.

    All this nonsense about Canadians taking on too much debt is ridiculous. Debt is cheap, use it while you can to build your nest eggs.

    Unfortunately, there will always be people that don’t read enough blogs like this. They will have to suffer the consequences. But the influence of that group on the real estate market in Canada is minimal. So it won’t have a downward effect on prices.

  12. 12. nobleea

    Lakedweller:
    “The average price of a starter home in almost every major city in Canada is over $300,000. That means a first time buyer would have to come up with $30,000 and closing costs. That is unrealistic in this environment. If property prices stay relatively flat for the next few years, wages will catch up and 10% will be attainable. But it isn’t right now. ”

    It’s unrealistic because prices are too high. There was a time, long ago, when people used to save up their money for a nice downpayment. And really, saving up 30K is only 500$ a month for 5 years- that should be easy if you really want to own a home. And if you think 5 years is too long, then people have become far too entitled and impatient.
    I If first timers can’t afford 30K now, then let the market correct itself, don’t change the market just to accomodate them.

  13. 13. nobleea

    A comment on the qualifying payments at the 5 yr posted rate. I guess it’s a nice check up front, but there’s nothing stopping people from gettting in to other commitments after the mortgage is signed and getting rid of all that cushion room.

  14. 14. Money Lover

    I would like to think that the institutions that are providing these wing and a prayer mortgages would employ some restraint at some point as well. Responsibility lies on both sides of the equation. Although, as long as there are no consequences for lenders, (ie. getting bailed out by the taxpayer) why would they. Also, who in their right mind would sign up for a loan of any sort and not think about all the variables in repayment. Like, can I actually afford this, or what happens if my payments increase. Honestly, what has this world come to.

  15. 15. Greg

    It’s the speculators (errr.. “investors) that are the biggest threat to the bubble. Considering how overheated the market is and the danger of prices coming back down to reality, 20% requirement is prudent, since a 20% price drop is certainly not out of the question.
    I agree however, that that real way to fix the problem is to not allow an amortization of longer than 25 years. Just look at what happened in Japan when they allowed 100 year mortgages. People will pay whatever they can afford, which will be more & more the longer the amortization is allowed.
    I only had the 25 year option, and hence was not required to overextend myself.

  16. 16. Lakedweller

    I can’t say I disagree with Nobleea about prices being too high, but this is the system that we have adjusted to. If first home buyers get pushed out of the market, then the move up buyer can’t sell their house and the retirees can’t downsize (simplified example) resulting in a frozen real estate market.

    High housing prices is the new reality especially in the new home market, due to increased building costs, high servicing costs and punative municipal levies. So I don’t see new home prices coming down any more than they have. There is significant refusal to give up the idea of owning a single family home. Lots are as small as they can get in most urban centres. 70% of home buyers will chose to live farther away in order to get their detached home.

  17. 17. mojo30

    Lakedweller – RE prices need to be based off income, not leverage and low rates. Right now the average income in the GTA for a 2 person household is in the $70k range, while the average house is $430k. How is this affordable? its not, prices will drop as they have all over the world, manufacturing that is lost in this country will never ever come back, and so if there is no work who is buying and how, low rates have created a bubble which is quietly being aknowledged by the government. Canadians from all walks have been smug about the so called ‘great banking system’ but they forget that massive debt that households and government now hold, Taxpayers will be paying for this, CMHC will need a bailout AGAIN, the government already took over a 100 billion off their books..who do you think pays for that? Flaherty?

  18. 18. JG

    Investment properties down should have come up to 30%, to discourage wannabe investors. This applies to all those realtors who line up in front of condos and new developments, who profit from the real average guy who can barely save for the first time purchase of his life. Don’t get me wrong, there are investors and investors….

    35 years should still be an option, due to the harsh economic environment conditions. Very unlikely to stabilize in the short term, some flexibility in the rules is needed.

    Open the option to discharge part of the mortgage payments on taxes, this will encourage mortgage repayment faster.

    Thks

  19. 19. Lakedweller

    $3 on a hundred. I am willing to pay that to have new schools built to deal with population growth. And I’m willing to pay that level of interest to continue to build capacity within the Canadian economy.

    The great debt debate is comical. We live in a country that still has ample opportunity to grow. In the same way that my future wage increases will help me pay my mortgage off faster, increased tax revenues will support debt repayment in the future. Defecit spending is a whole different animal. I don’t support program spending for the sake of keeping people employed.

    More than 9 out of ten people are working in Canada. More and more single people are chosing to own their own home. And defaults are almost nonexistent in Canada, even with the drop in real estate prices that occurred in 2009. That just isn’t the Canadian way and the banks will back that statement up.

    By the way the government will profit from the debt they took off the bank’s books. CMHC didn’t get a bailout. Canadian banks are held to a high standard of liquidity. The CMHC and the big banks exchanged mortgages for “T-bill like” papers that allowed them to continue to take on mortgages.

    The GTA is an interesting place to live. It is no longer a typcial urban Canadian city. The wealth of living options is amazing. Density and transit make living without a car way more feasible than any other city in Canada, other than Vancouver. Unfortunately the GTA also has the greatest disparity in incomes. The fat cats that work downtown (not in manufacturing) are making way more than the average and therefore set the price for residential properties where ever they chose to buy.

  20. 20. thbt

    @Lakedweller: it would be more accurate to say that we have 10% unemployment.

    Sorry, but you sound like CREA economist Gregory Klump trying to cheer the market on: “If we have 10 per cent unemployment, that means 90 per cent of people are employed.”

    As for defaults, there’s been a 50 per cent increase in mortgages running 90 days or more in arrears in 2009 compared with a year before.

  21. 21. Josun Park

    I think this will reduce the housing prices after it is implemented. The 5 year fix rate test will eliminate many people qualified for the home. This will result in more inventory then demand.

    Thoughts?

  22. Although the changes seem a tad extreme for rental properties, I don’t really have any problems with the changes. Reason being:

    i) if you want to own a home, you should have some equity in the first place to buy it
    ii) refinancing a home is not for the majority of homeowners, and
    iii) when applying for a mortgage, you should be prepared to pay interest on the mortgage that is not at some 30- or 40-year historical low. In other words, prove you can live within your means and we’ll allow you to borrow the money.

    The changes are simply saving many people from themselves, which is not a bad thing.

  23. 23. Future Money-Bags

    Like others say, saving 20% is not super hard thing to do. If it takes you over 5 years to save for 20% downpayment, on the value of home you want, than you simple will be struggling with the mortgage.

    I have been saving for just over 3 years, and am able to save over 50% of my monthly income. I now have 20% for many homes in my area (van) but not quite enough for a newer home which I will be purchasing.

    I may be frugal as hell, and keep my expenses far lower than my savings, but I also don’t earn that much. So like the old age saying goes ‘if I can do it, so can you’.

    My main concern.. Is hopes that the olympics don’t have a seriously negative effect on the housing market. And that rent prices don’t drop :)

  24. 24. Krista

    I think they’re great. I live in Calgary and for a while (before the house prices got really ridiculous) people really had the mentality that investment real estate is a guaranteed cash cow. It’s not. It’s riskier than people think, and a lot of people got taken by surprise when things changed.

    the bottom line is, if you’re a serious investor with real estate experience, you can come up with the 20%. If you can’t come up with it, you should reevaluate whether it’s the best investment for you.

    It always amazes me how we easily we forget what can happen when too many people get too comfortable making all of their investments with debt.

  25. 25. jesse

    “What are your thoughts on the new mortgage rules?”

    No matter what they do, they can’t avoid that prices are overvalued compared to incomes and rents. I think they’re hoping — praying more like — that they can engineer muted declines and avoid a US/UK type scenario.

    Good luck. If they do nothing the market will collapse on its own weight. If they do too much they will precipitate a collapse. To think they can balance the market on what is a tip of a pen is a bit optimistic.

  26. 26. GrandougfromGuelph

    It’s true that homes are less affordable right now due to the recession and job losses. However many are assuming that means housing is “overpriced”.
    I contend the two are distinct, related but not the same.
    Some experts are stating that prices are 20-30% too high.
    You will see that the prices of new homes (which do impact resale prices) are “sticky” (i.e. builders will simply build fewer if demand slackens), but the prices will not go down! This is because the cost of a serviced lot (municpal levies), lumber, cement, bricks, and labour are NOT going to go down in price.

  27. 27. Leo

    The rules are mild and supportive of this current environment.

    However, I’m concerned about malleablility of these rules are and fast they can change. Now we don’t want them changing every five minutes, however, we want them to bring relative stability to the general marketplace.

    The second point, refinancing, is a good change for the current situation. Slowing upward tendency and capping leverage for the overleveraged is good. But if the markets were to turn, the 5% difference will just as easily exacerbate any downturn that appears suddenly.

    If markets drop significantly, many may require financing. Yet with diminished equity, will be less able to, resulting in foreclosure scenarios, leading to futher and imminent downward pressure increasing.

    I just hope this sort of corollary has been considered and future considerations will mitigate such eventuality.

  28. 28. The Rat

    I think the 3rd change that’s heading our way, the one that requires at least 20% down payment for investment properties, will likely have some investors scrambling to seal some deals before this is implemented by the spring. When you factor in a property at say, 400,000, you’re looking at an extra $60,000 to cough up. That’s huge!

  29. 29. Future Money-Bags

    Dose anyone else think that the increase in interest rates in the next 12 months will force people to sell for less; due to not being able to afford their current mortgages any longer? I’m on a huge predicament on when is best time to buy.
    I don’t want to rush into buying a condo, but I wanna get in there and be part of it! My first goal is to wait for summer to see if the olympics has a negative effect on housing affodability and the same with interest rates making an increase at the end of 2010.

  30. As a mortgage broker I think the change on investment properties was prudent. Five years ago before the run up in housing prices and mass changes to insurance products you had to have 25% down on an investment. I don’t believe that the average consumer should be partaking in massive leverage by having a personal residence and several other properties all with only 5% down. That being said there are some sophisticated borrowers who may have been candidates for 5% down rentals, however if they are structured properly this change should not be an issue for them anyways.

    This change will get a majority of the speculators who have run up market prices out of the market. This will cool the market while promoting balance.

    As for my colleagues who are concerned about the impact this change will have on their clients, well, I think they are confusing concern for their clients with concern for their commission cheques.

  31. 31. Lookin2Learn

    With regards to the 20% down for investment properties, I recently listened to an interview with REIN founder Don Campbell. I think he had many good points, one in particular was his view on why the government implemented the 20% down to prevent speculative buying on preconstruction properties and property flipping, where the investor puts a small downpayment with the intent to flip the property hoping for large returns which was happening excessively and inflating market prices. These speculators and flippers are really forced to think twice about these investments now. It forces them to put their $$$ where their mouth is.

  32. I came across a Mortgage Broker that is publishing a book about Robbing your Bank… not literally but he is showcasing how to negociate with your bank for a better rate on your mortgage.

    He has created a Facebook profile and it shares that the offical website will be launched shortly. It seems very interesting and if you are looking for a new mortgage you may want to check it out.

    http://www.facebook.com/#!/pages/Kelowna-BC/Rob-Your-Bank/280943794625?ref=sgm

  33. 33. Debt Consolidation - The Financial Power

    The new harmonized tax will increase even more the down payment for home buyers. If we keep the 300,000 home in mind the tax now is 15,000 with the new harmonized tax that amount will be 39,000 that’s a 24,000 difference the buyer will have to pay. With the economy down and with the new harmonized tax and mortgage regulations it seems that real estate will slow down. I wonder why would the government come up with such tax and mortgage change in these difficult times. To save $500 a month for many families is totally impossible. If you brought a home with a 5% down payment that was doable but with 20% many first home buyers will have to put off their dreams of owning a home.

  34. Someone had to make a change somewhere, so the Government decided that it would. All of the people who lost or nearly lost their house recently, in my opinion, would lead me to believe that if we didn’t make it more difficult to get a mortgage, then we would again be giving them away to everyone with a pulse and ultimately end up in the same financial/mortgage fiasco that we are still trying to get out of. I believe that these measures, albeit small ones, will hopefully make people work a little harder and longer to achieve their goal of having a home of their own.

  35. 35. Alex Hung

    Thanks for the mention about change in the new rules in mortgage. Hope all the Canadians are benefited from these changes.

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