The government of Canada announced a balanced change to mortgage rules. These changes will not impact most consumers but will reduce some of the riskier lending situations.
Summary of changes:
- All consumers must qualify on the 5 year fixed rate. This likely will be the discounted rate but avoids situations where approvals were granted for variable rates. Sadly this will still allow people ill advised or less educated to get themselves into trouble by going into a variable rate mortgage and then facing much higher payments when rates eventually jump up. Just because you qualify for an amount at today's ridiculously low 5 year fixed rate doesn't mean you can afford your mortgage when rates are 2% higher in a few years.
- Investors MUST put at least 20% down payment. This effectively wipes out the high ratio investment property programs. I never had clients take advantage of those programs as the premiums were very high and the properties would never produce cash flow. This is a very good thing in my opinion.
- Refinance to maximum of 90%. Previously you could refinance your property to 95%. In most situations where someone is refinancing to 95% it is because they are struggling with their cost of living relative to their income. In some cases it is short term due to an unexpected situation but more often is is poor spending habits. The new rule is a good thing as it allows for some deflation in values before the property is underwater and possibly enters foreclosure.
Impact of changes on the housing market?
I don't see how any of the above are going to have any kind of significant change on overall demand for housing. It will take a bit of demand off of the highest risk lending which is a very good thing. The 5 yr rate to qualify will help reduce future foreclosures by a modest amount. But none of the above take active buyers of today out of the market. The only way the housing market is going to slow down is by reducing demand.
More to come?
I would not be surprised to see a last minute additional change of reducing the max amortization from 35 to 30 years. I suspect it would be last minute to avoid a rush on beating the deadline. Because parliament is not in session, the changes can be passed yet and have to wait until then. I expect there to be more changes than just the 3 announced today. However the announcement today should be taken as notice that changes are coming.
