Earlier today, Finance Minister Jim Flaherty announced changes to mortgage lending standards for mortgages. He said that while the housing market is healthy and there’s no real evidence of a bubble, the moves are needed to “help prevent negative trends from developing.”
The changes are designed to bring stability to the lending market and head off potential problems such as those experienced south of the border with the sub-prime mortgage crisis. With interest rates almost certain to rise in the months and years ahead, the government is trying to ensure Canadian borrowers will be able to carry higher debt loads created by higher rates.
Having said that, the changes are far less than rumoured and are likely to have little impact on the average home Buyer. Yes, people can still buy a home with a down payment of 5%.
The new rules are made up of three changes:
- Borrowers will need to meet standards for five-year fixed-rate mortgages regardless of whether they’re seeking a loan with a lower rate and shorter term. Right now, borrowers may qualify for mortgages based on lower rates as a percentage of income. Under the new rules, only the 5 year rate will apply. Why it’s not so bad: In 2009, over 85% of mortgages were for fixed terms and of those, 70% were for5 year terms. All of those would still qualify under the new rules.
- The maximum amount Canadians can withdraw when refinancing their homes changes from the current 95% to a maximum of 90% of the value of their homes. In many cases, refinancing options are used to transfer high credit card balances to lower rate mortgages. Under the new rules, mortgagees will have to build up at least 10% equity in their homes in order to do so.
- The down payment for government-backed mortgage insurance on speculative, non-owner occupied investment properties increases from 5% to 20%. This is intended to discourage real estate speculation often seen in rising markets driving house prices artificially high.
It would appear to me that the government has taken a balanced approach to this issue in a way that should neither spur a run-up in pricing or dampen the real estate market. What they’ve done is put rogue lenders on notice that the government is watching.
The new regulations take effect on April 19, 2010.
Marg Scheben-Edey is a Broker with RE/MAX four seasons realty limited, Brokerage in beautiful Collingwood, ON. With three decades of experience, Marg is a leader in the local real estate marketplace and is ready to help guide both Buyers and Sellers in achieving their real estate goals. Email Marg