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:
- 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.
- 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.
- 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.
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