What Are The New Mortgage Rules?

On April 19, 2010, the Canadian Federal Government implemented changes to the lending requirements for government-backed insured mortgages. In the words of Jim Flaherty, Minister of Finance, these actions will “help prevent Canadian households from getting overextended, and… prevent some lenders from facilitating it.”

How has mortgage lending been impacted?

1) 5-Year Fixed Qualification Rates
Borrowers will need to qualify using a 5-year fixed rate, regardless of what term they choose (replacing the former 3-year fixed rate).

Under the new rules, all buyers requiring mortgage insurance will have to meet the “ability to pay” for a higher, more expensive, five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and a shorter term.

This change isn’t really jolting as the majority of homebuyers are actually choosing five-year mortgages these days. According to a study* issued by the Canadian Association of Accredited Mortgage Professionals (CAAMP) in January 2010, fixed-rate mortgages accounted for 86% of mortgages set up in 2009 and, of those, 70% were for a five-year term.

This new rule mitigates the risk of an unaffordable mortgage later on, and the possibility of losing a home. Not a bad move in the interest of long-term home ownership.

2) 90% Maximum Refinancing
This change restricts the ability of existing homeowners to refinance their mortgages to take on more debt. The new ceiling is 90% of the value of the home, compared to the former 95%.

Homeowners often consolidate high interest debt into lower cost mortgages. By reducing the refinance limit, homeowners will keep more equity in their home rather than turning it into the ‘proverbial ATM machine’ to pay off higher interest debt – again, not a bad measure.

3) 80% Maximum Insured Financing On Rentals
Mortgages for homes in which the borrower will not occupy will now require a 20% down payment (increased from 5%).

This change will reduce speculation in residential real estate since borrowers now have to put up significantly more money in order to buy. It will also reduce the supply of rental units and limit investment options for Canadians. This rule does not apply to multi-unit owner-occupied homes with rental units, such as duplexes and triplexes.

Those seeking CMHC insured mortgages (or an equivalent private sector mortgage insurer) are affected by the recent changes. If you are able to find someone willing to offer you an uninsured mortgage, these rules do not apply to you.

The implementation of new mortgage requirements is an effort to make the Canadian lending industry that much more resistant to what happened in the United States in 2008. “A key lesson of the global financial crisis is that early policy action can help prevent negative trends from developing,” said Finance Minister, Jim Flaherty.** The Canadian Government has essentially lowered their risk by not insuring risky mortgage behaviour and those who choose to overextend themselves unwisely.

What’s The Skinny On The HST?

After July 1, 2010, the Ontario Government will put into force the new Harmonized Sales Tax (HST) at a rate of 13%. This tax, a blend of the GST and PST, will apply to pretty much everything we purchase.***

First, the good news for homebuyers….there is no HST tax payable on the purchase of a resale residential home! There are some other exemptions including mortgages, mortgage interest, and condominium maintenance fees. However, many services involved in real estate transactions such as legal costs, home inspections, surveys, appraisal fees, and condo status certificates, will be subject to the HST. Other items may include mover fees, electric bills, gas bills, water bills, insurance premiums, and pretty much every other good and service you purchase.

The Ontario Real Estate Association (OREA) estimates that the HST will add $1,513 in new taxes to an average resale home costing $318,366. OREA also estimates that the HST will add $310 million in new taxes annually to residential resale home transactions.****

Home Ownership is Attainable

Will these changes impact prospective buyers? Yes, for sure. However, some things remain unchanged, such as the 5% down payment and the 35-year amortization. The door of opportunity hasn’t been shut for those wanting to purchase a home.

With careful planning and a balanced approach, investing in real estate remains a viable way of building equity over the long term. Contact the Live in Toronto team today to see if home ownership is right for you.

*CAAMP study:
http://www.caamp.org/meloncms/media/CAAMP%20%20Winter%20Report%20Black.pdf
**The official announcement by the Ministry of Finance can be viewed in its entirety at:
http://www.fin.gc.ca/n10/10-011-eng.asp
***For more information on the HST, please visit: http://www.rev.gov.on.ca/en/taxchange/faq.html#q33
****OREA comments: http://www.newswire.ca/en/releases/archive/February2010/16/c2205.html