New Mortgage Rules
On April 19 our government will lay down 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.
Rule Number 1:
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 4.09%.
The Government’s Reasoning being This initiative will help Canadians prepare for higher interest rates in the future.
Due to this, it will now be harder to qualify for a variable-rate mortgage, but not much harder. Most lenders already use three- or five-year mortgage rates to calculate a borrower’s debt service ratios. For many discount lenders, this means the qualifying rate will go from something like 3.25% to 3.89%—not a huge difference.
This looks like a sound and necessary change--although many lenders already use similar guidelines.
Rule Number 2:
No longer will you be able to refinance your home to 95% of it’s value. 90% will be the new refinance maximum.
The Government’s Reasoningbeing This will help ensure home ownership is a more effective way to save.
Due to this 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.
This will affect 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.
Rule Number 3:
People buying non-owner occupied rental properties will need to put down 20% to get an insured mortgage, versus 5% previously.
As per Government this will reduce speculation.
Due to this, 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).