Canada's New Mortgage Rules - What do They Mean for You?

February, 2010.  The federal government just announced a number of new Canadian mortgage rules.  The rules, focusing on the way mortage insurance works in Canada, were announced in response to the news that Canadians are now facing record debt. 

The three cornerstone changes:

• Mortgage loans will be income tested agains the 5 year rate
• Mortgage refinancing is now restricted to 90% of the value of the home - down from 95%
• Buyers of non-owner occupied dwellings will need to put down a minimum of 20%

With these changes the government hopes to accomplish a few things:

First - Income testing your mortgage loan over 5 years rather than 3 years will help to ensure that even if interest rates

rise, individuals will still be able to meet their financial obligations. This effectively lifts the qualifying interest rate by 1 percentage point, putting constraints on the size of the mortgage for which an individual can be approved. This will not impact the mortgage payments.  Simply put this means that, in particular, while first time home buyers will still be able to purchase a house, they will most likely have perhaps start with a smaller, more affordable home. 

Second - By limiting home refinancing from 95% of the value of the property to 90% the government is, again, trying to help Canadians address their increasing debt.  Basically before these new rules, a homeowner could draw equity from their home - back to the %5 down payment that they put on the property.  Now, as owners make principal payments over time and build equity, they will not be allowed to reduce their equity position until it exceeds 10% of the value of the home.  And, now owners will not be able to draw down below that 10% mark. The impact of this change should be quite limited. Less than one-third of refinancing is done by individuals with mortgage loans in the range of 90% to 95% of the value of the property.

Third - People who are buying homes for their investment value are now going be required to put a minimum of 20% down - up from the previous minimum of 5%.  In doing this the government is trying to temper the speculative real estate buying that can artificially heat up the market.  Impacting larger real estate investors, this will also impact individuals buying real estate for investment purposes including people looking for rental properties. As an estimate this change might impact about 5% to 15% of new mortgage applications.  We anticipate that raising the requisite down payment could be a significant deterrent to people looking to buy investment properties.

In general these announcements - in particular the larger down payment requirement - for non-owner-occupied dwellings should reduce the risk of out of control speculation. Also, it is only a matter of time before the banks will have to increase their lending rates.  In changing the practice of income-testing from a 3-year to a 5-year post rate will hopefully address this reality.  And, by limiting the equity that people can withdraw from their home to 90% should help people focus on increasing their personal wealth rather than on over-spending.

Many borrowers, lenders, builders and others affected by activity in real estate markets will most likely not be happy with these changes however, if they do what they were designed to do - limit the possibility of real estate boom/bust cycles - we will all stand to benefit. The goal?  Steady, sustainable sales growth; sustainable price increases keeping homes affordable for potential buyers and a new focus on managing our debt.