Tuesday, February 16, 2010

New Rules


Flaherty has announced new mortgage rules to take effect by April 19th to "help negative trends from developing". From the Deparement of Finance website:

  • Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
  • Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.
  • Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.
5-year fixed mortgages are still under 4% so the preparation for future rate increases is minor. I hope this doesn't give the any buyers a false sense that qualifying for the 5-year fixed makes their mortgage safe from potential rate hikes - I think using the 3x income rule as a more reasonable measure.

Absent was a decrease in amortization and increase in down payment. I have previous posts discussing why shorter amortizations and larger downpayments are important. The previous two posts were regarding 0 down/40 year mortgages but the same principles applies to 5/35 mortgages as well. CMHC fees are reduced for each additional 5% down (up to 20%) and total interest costs are reduced as amortization is shortened.

7 comments:

Web Designer said...
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Radley77 said...

I think the first two rules were a move in the right direction. However, I think the 20% downpayment by investors *may* be overly prescriptive. If investment in new housing units is limited too much due to a smaller pool of potential investors, yet does not come with an decrease in loan defaults, then there is little value in this regulation. I agree that I think the market should remove highly leveraged investors, but I think there is a bigger picture that should be evaluated instead of just a 20% downpayment (including asset position and credit history).

Perhaps a 15% downpayment minimum for investors with several other measures, instead of a 20% downpayment minimum across the board.

Radley77 said...

It's also more than likely that in the short term (year or so) these measures will reduces sales enough that the sales to new listings ratio is tipped into a falling price market. It won't take much.

Carioca Canuck said...

Radley77......

There are 5,000 +/-places for rent on Kijiji herein YYC......places that in most likelyhood used to be called "listings"......at 50% down for investors it still wouldn't matter IMHO.

如此的 said...
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BearClaw said...

Radley,

I think the 20% down for investors was fair because it is more like the government removing an incentive as opposed to restricting investment. Someone looking to sell rental accommodation has alternatives to selling to the under 20% down crowd.

-Those with greater than 20% down payments.
-Owner occupiers with as little as 5% down.
-They could keep the asset and rent it themselves.

Its not like people are going to bulldoze existing rental properties because of the new rules. If less people are qualified it may increase the cap rate over time.

CC,

I question hard numbers like 5,000 listings from a site like craigslist or kijiji. How many are duplicates or housing wanted or beware of scammer ads? I do acknowledge that the rental market is softer now than it was a couple years ago however.

Investors with over 20% down are not getting insured mortgages so raising the limit to 50% would have no impact to them. If you mean the government restricting financing for non-CMHC mortgages as a hypothetical I think the market would find a balance (over time) with higher rents and lower asset values. It would be ugly though.

Carioca Canuck said...

You'd have a point about Kijiji......but only if the 5,000 additional listings didn't suddenly dissapear from CREB and there were only 400 for rent listings on Kijiji a mere2.5 years ago.