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Feb 2010...New mortgage rules won’t affect most homeowners or buyers

Finance Minister Jim Flaherty has announced three new mortgage rules saying the government is taking “proactive, prudent and cautious steps" to prevent a housing bubble. Well, there’s probably no reason for alarm: these new mortgage rules won’t affect most homeowners or buyers.

The gist of the new rules is that it won’t be as easy to teeter at the top of your lending limit; the government thinks homeowners should have a bit of equity hedge and a realistic expectation of what they can pay each month. Most Canadian homebuyers are already managing their mortgages according to these standards anyway, although some new and very leveraged buyers could be affected.  Real estate investors and speculators may notice these rules the most, which take affect April 19, 2010. Here’s the quick rundown on what’s new:

Think five-year, fixed-rate. Whatever kind of mortgage you eventually decide on, the new rules say that you must qualify for a standard five-year, fixed-rate mortgage. What you choose, of course, is up to you and your mortgage planner; you may opt for a shorter term and /or a lower rate. While the government has said this test will help homebuyers prepare for higher rates, most lenders were already qualifying homeowners on the three-year fixed rate. As a result this shouldn’t affect too many homebuyers.  Buyers who don’t qualify for the five-year, fixed rate will need to downsize their expectations on how much home they can afford. Based on a 5-per-cent down payment, 35 year amortization, and a home price of $300,000, a buyer would need about $7.400 more in annual income to qualify under the posted five year fixed rate versus the three year rate. 

Protect at least 10% of your equity. Refinancing your home to pay down high-interest debt is still a smart strategy to save interest in the long term. There are common sense limits to using your home as a piggy bank, of course, and now the new rules dictate that you must protect at least 10% of your equity, up from 5%. Where this could cause a problem is with those who are overextended on high interest debt.  They may no longer be able to payout all of these debts and get on a sounder financial footing with a lower payment and less interest costs.  Depending on their reasons for having a high debt load these clients may end up in a bad credit situation or bankrupt.  While the mortgage planners at Mortgage Architects have been offering credit and debt counselling to their clients for years, more people may now be in need of this service.   

You need 20% down on an investment property. This is a change that primarily affects investors. If you’re not personally living in a property that you own – such as a second home or a rental property - you will now need a minimum downpayment of 20%, up from 5%. Investors used the 5% rule to leverage their mortgage for tax purposes: so they could write off more interest against their rental income. This could slow speculative real estate purchases, for instance buying new properties with the intention of flipping them later, which is common in the condominium market.

While we are looking at rising rates in the future, the housing market remains healthy. These upcoming changes are unlikely to affect the majority of Canadians, although there could be a flurry of activity before April 19 – as homebuyers take advantage of the last few weeks of the existing rules by moving up purchases and refinances. If you think the new rules could affect you, call an experienced mortgage planner right away.

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