The new rules, set to take effect on April 19, 2010, aren’t going to be as intrusive as many experts previously predicted, but they will work to prevent Canadians from overextending themselves.
While Flaherty stands by the belief that a housing collapse is not yet imminent in Canada, he does admit that the country’s hot housing markets needed to be treated proactively. With these new rules in place, he believes Canadians will be better prepared for an influx in interest rates, able to foster equity growth in their homes, and opt to stay away from “reckless real estate speculation that has been known to drive housing prices to unsustainable levels”.
Essentially, there will be three major changes to how Canadians borrow money:
- All borrowers will be required to meet the standards for a five-year, fixed rate mortgage even if they choose a mortgage with a lower interest rate and a lower term.The Bank of Canada posted the 5 year rate at 5.85%. I guess this just puts us all on a level playing field.
- Homeowners who opt to refinance their home will only be able to withdraw 90% of the value of their home, which is down from 95%.I think there has been some confusion about this new rule in particular. I was in a line up at the grocery store when I overheard a gentleman stating that he would now have to put 10% down on a property he was interested in purchasing. Bottom line: you can only borrow 90% of the value of your home and you need to save 5% for a down payment. I guess in a roundabout way, this could have been misconstrued as a change with respect to the minimum down payment on a property.
- Investors who require mortgage default insurance (CMHC or Genworth) to purchase non-owner-occupied properties, will now require a minimum down payment of 20%.If you have your name on title for one property, a second property would automatically be deemed a “non-owner occupied unit.” The minimum down payment for non-owner occupied units has risen to 20%. This rule was instituted to prevent investors from over-extending themselves. You can no longer run around and purchase properties with 5% or 10% down. Developers have also started to ask for 20% instead of 15% or 10% down as they need to collect heftier down payments from buyers so the banks will finance their projects. It’s tougher for everybody to get financing these days, developers included!
For the most part, it seems people are happy with the new mortgage rules being implemented by the Federal Government. These new rules primarily give the impression of protecting homeowners, without really impacting the average homeowner at all.
But, given the diversity of the Canadian real estate market, it would be impossible to create a one-size fits all answer to a potential housing bubble problem.
Written By: Tanya Miedema, Mortgage Agent, Axiom Mortgage Solutions (formerly Unisource Mortgage)