New Canadian mortgage rules effective April 19 2010
Insisting that Canada is not facing a housing bubble, Finance Minister Jim Flaherty announced a tightening on mortgage lending rules, which he says will “help prevent negative trends from developing.”
Effective April 19, 2010 the following changes will take effect.
Home buyers must qualify for their mortgage using the five-year fixed mortgage rate, regardless of the term that they chose to finance their home.
Refinance loans will be limited to ninety percent of a home’s value.
A twenty percent down payment will be required to finance government backed mortgage insurance on investment property.
Do these changes go far enough to cool the Canadian housing market?
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Norm Fisher
Royal LePage Saskatoon Real Estate
There's 13 Comments So Far
February 16th, 2010 at 10:53 am
This is the announcement many of us have been waiting on for well over a year. With this, the “party” is now officially over. The refinance change is pretty substantial, and is going to seriously impact anyone with 5% (or less) equity in their homes. And the 20% requirement on investment property is the end of CHMC-financed speculation. I anticipate a level of frenzied activity over the next 2 months…
Captcha: “party disrupted” (fitting, don’t you think?)
February 16th, 2010 at 4:10 pm
Jason,
“The refinance change is pretty substantial, and is going to seriously impact anyone with 5% (or less) equity in their homes.”
Really? People with 5% or less equity aren’t very good candidates for “refinancing.”
These three “weapons” strike me as a tad bit impotent. As one of my wise friends suggests, it’s “political posturing” at best.
Major lenders have been qualifying on five-year fixed rates for some time.
I’m uncertain on the “speculation” angle but I’m thinking business as usual on the other two points.
February 16th, 2010 at 7:24 pm
I am with Norm, this is a huge non-event. It will mostly impact investors/speculators and only those trying to buy a property with less than 20% down. When the boom started it was largely driven by investors from Alberta where 20% down, or even 100% down was not an issue. I guess it will have some subtle impact but not enough to actually bring prices down. Likely they just won’t rise as much.
Right now, you can buy a nice rental house for $350k with $70k down and a $280k mortgage. There are tons of people out there who can put together $70k. If you elect a variable rate mortgage, your payments are $1200 /month. You can rent up and down for over $2000 a month. Even with property tax, insurance, repairs, etc you can make money. That fact, and none of that other government noise is what is keeping housing prices up. Now these investors are going to be get crucified if interest rates spike but until then they will keep buying and housing prices will at least stay level.
The fact that government is taking measures to cool housing without increasing rates makes me wonder if they aren’t planning on an extended period of low rates. They want the rates to stay low to stimulate the economy but without overstimulating housing, hence they take these unconventional measures to cool housing. Just food for thought.
February 16th, 2010 at 7:54 pm
This is much too little, far too late, and in mostly the wrong places. Not being prone to hyperbole, I’m comfortable saying that the government’s latest “effort” is akin to throwing a tray full of ice cubes at a roaring blaze.
I suppose making explicit that borrowers should be able to qualify for 5-year fixed rates is something, but as Norm points out, many lenders are already doing this as a matter of course. Considering that I can find a 5-year fixed rate at 4.09%, this is a bit of a joke. Before all of this is said and done I would not be surprised to see rates near double that. Still levered at 20:1 (or even 10:1), this remains a mighty precarious position to be in when rates rise and/or prices fall, unless one has other (liquid) assets to fall back on. This will do nothing to curb speculative leverage risk amongst the woefully mal-informed masses (in a particularly nasty recession, no less).
The refinancing bit will have very little effect in curbing current market excesses. Admittedly, the maximum 90% refinancing rule will have the effect of helping marginal owners keep some equity in their homes and will be particularly advantageous when home prices fall. As far as the 80% maximum insured financing on rentals goes, I can’t really comment objectively. I’m of the mind that people who are attempting to finance rental properties should not be eligible for taxpayer-financed CMHC insurance in the first place. If you are willing to accept all of the financial reward of such a speculative position regarding a rental property, you should be willing to bear all of the risk.
February 17th, 2010 at 1:39 am
I think the government is “political posturing” itself for a no-win situation. If nothing is done – “bubble pops”. If something is done – “bubble pops”. Flaherty just wants to look like he isn’t ignorant. When the bubble pops he will be reminding us in how the Conservative’s “Action Plan” tried to deflate the bubble.
From now til 19 April 2010 will be interesting. Will it be a rush to enter the market, or a scramble to exit? Tighter monetary policy usually signals the end of a business cycle. So I think it’ll be a scamble to exit with smart money remaining on the sidelines.
February 17th, 2010 at 6:45 am
I really have no idea how much of a factor “speculation” is across the country but I don’t think it’s much of one right now, at least on the buy side. Over the past year, we haven’t taken many inquiries from buyers looking to invest in real estate. There are definitely some specs thinking that now might be a good time to sell. Whether that will result in a “scramble to exit” remains to be seen, but of course, April 19 isn’t a long way off so we’ll know soon enough.
Jen,
“Considering that I can find a 5-year fixed rate at 4.09%, this is a bit of a joke.”
Funnier yet, TMG is advertising a five-year rate at 3.69% today.
February 17th, 2010 at 11:04 am
Peter,
Are there still many people from Alberta who can put 20%- 100% down as they did in 2007? Even so, the policy at least makes it true that they will be able to speculate on only 1/4 number of houses for the same amount of money. Though as Jen said, it perhaps is still much too little, far too late,
I believe what Norm said is true, currently the buyers are mostly buying for a place to live. However, they are probably buyers who wouldn’t have bought if the rent hasn’t been so high. It seems that condos priced below 300k sell the fastest. I guess that’s part of the reason now there’re no more waiting lists for many vacant rental properties. And in some cases, if you negotiate with the landlord, they agree to lower your rent. Considering the space one person could afford in the past now is usually occupied by two, and so many new buildings are now for rent, the vacancy rate has to go up. Not sure how long and by how much it’ll take to bring down the housing price though.
February 17th, 2010 at 11:17 am
I agree with most commenters so far. Measures like this, but which go further still might have had an impact earlier. But now? This may actually make it harder for regular people to get into houses by restricting their options and having zero impact on prices.
I might be selling my house soon though. Hopefully I can break even…Fingers crossed.
February 17th, 2010 at 4:52 pm
Alex, maybe I missed something, but I think for first-time home-buyers who have a decent income there’s nothing changed.
Personally I think the earlier you sell, the better price you’ll get…
February 17th, 2010 at 5:58 pm
Yeah, that’s my impression as well.
Although the real question is whether or not I’ve done enough to make the home worth more than what I paid for it. Or at least, recoup enough to pay off the mortgage and all the arbitrary penalties & fees.
Scary. I guess in the end though, if I suffer, the bank suffers. I wonder if they’ll see it that way too?
February 18th, 2010 at 9:17 am
I don’t believe there’s gonna be a big crush in the housing market which will make you suffer enough to make the bank suffer eventually,
. However, I really don’t know under what circumstances one can declare bankrupt.
February 22nd, 2010 at 11:31 pm
Starting in July this is all academic, because we’re going to see the first of many interest rate hikes to come. And just like US sub-primes, when all these mortgages reset to higher interest rates (like 6-8%) in a few years we’re going to see our own Canadian version of a housing crash.
March 15th, 2010 at 11:27 am
I’m a little late in the conversation…however we are moving from Alberta and have been looking for a house for a while. We would have been a cash buyer and therefore would not be subject to the woes of new lending regulations or rate hikes and are still nervous about buying. I ran some numbers comparing renting at $2200/month to buying in the $450,000 range (assuming 0 gain/loss in housing prices), it would take over 4 years before buying would be better than renting. My money is on falling prices, so my money is staying invested and we are renting. I think buying right now would be a mistake, call me conservative.