By Jeremy Shaffner
With three new mortgage rules coming into force on April 19, as announced on February 16 by federal Finance Minister Jim Flaherty, it’s important to know how this will affect your clients in their bids to obtain mortgages moving forward.
The good news is that most of your clients will not be significantly impacted by the latest changes. The intention of the new rules is to curb speculation housing and encourage homeowners to use their homes as a savings tool, rather than borrowing home equity to pay down loans and credit cards.
Rule #1 – Minimum down payment requirements for non-owner-occupied homes will increase to 20 per cent from five per cent, and the way that rental income is considered has been scaled back from a maximum 80 per cent offset to 50 per cent added to income. With 20 per cent down, most rental property applications will be approved with conventional guidelines, so it will ultimately come down to the lender’s policy.
This rule will have the most dramatic impact of all three changes, but only on your real estate investor clients. Being required to put more money down and being able to use less potential rental income for qualifying purposes will displace many new real estate investors (who currently only make up around four per cent of all mortgage consumers in Canada).
This change is intended to avoid any kind of future housing bubble in Canada by curbing speculation building. The recent economic downturn caused builders to stop building and many new homes sat vacant throughout the early stages of 2009. When rates started to drop and buyers began to gobble up property that had been on the market for some time, the supply/demand ratio started to lead to higher demand and escalated prices.
Rule #2 – All borrowers will have to meet qualification standards for a five-year fixed-rate mortgage even if they choose a mortgage with a lower interest rate and shorter term.
Current standards for mortgage qualifying are typically based on a lender’s three-year fixed rate (if your clients are opting for a variable rate, home equity line of credit, or one-, two- or three-year fixed-rate product, which typically carry a lower interest rate). This qualifying standard has, in the past, been sufficient to protect consumers from rates increasing over the term (at least on paper). Essentially, the government is forcing people to prepare for a likely rate hike over the next five years.
Considering the average difference between discounted three- and five-year fixed rates is only between 0.30 per cent and 0.49 per cent, this should truly not have a drastic impact on the average mortgage applicant – if, in fact, the new rules intend to have mortgage applicants qualify based on discounted rates. It is still unclear if the upcoming alterations are meant to have your clients approved based on “posted” five-year rates, which would mean a difference of more than two per cent.
Rule #3 – The maximum amount Canadians can withdraw when refinancing their mortgages will be reduced from 95 per cent to 90 per cent of the value of their homes.
This final change will likely have the most impact on those Canadians who have a current government-backed insured mortgage and would like to take advantage of the equity in their homes to consolidate debt in the future. In recent times, with rates at historical lows, it’s been advantageous for consumers to roll their unsecured debt into their mortgage to decrease monthly payments – so much so that the government has sought an end to this trend of high loan-to-value mortgages.
This does not, however, stop consumers from overspending and taking on large amounts of credit card debt. In some cases, the ability to borrow the equity in one’s home to pay off debt has saved people from bankruptcy and kept them in their homes. Hopefully this change doesn’t backfire on the government’s intentions.
Only time will tell if the government’s measures to curb spiking house prices and encourage equity savings will be a positive change for Canadians.
Prior to this announcement, there was wide-spread speculation that the government was going to change current mortgage policies to include a minimum 10 per cent down payment, an increase from the current five per cent, and a reduction in amortization from a maximum of 35 to 30 years. Luckily for your first-time homebuyer clients, these rumours have not proven true.
Posted: 2010-04-07 07:53:07
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