New Mortgage Rules Coming

The Canadian government is reacting to suggestions from the Big 6 Banks, the Bank of Canada, and a wide variety of economists by making it a little more difficult to get into mortgage debt.  The reason so many organizations want to make it more difficult to get into a mortgage is because of the climb in housing prices over the past several months.

In 2007, Canadian housing prices reached an unaffordable level for over 30% of households based on several different indices.  What these indices looked at was the average household income and the average household mortgage payment.  Once the mortgage payment crosses the 40% of income point, this means many households will have a lot of difficulty making the payments.
In many parts of Canada (Vancouver, Toronto, Calgary, Edmonton) the prices were at the unaffordable level.  Now, despite the tough economic times, housing prices have climbed back to, and even past those 2007 highs.

What makes it possible for people to buy a home in this high market is the historic low rates, and too many borrowers may be maxing out their loans with the low rates, meaning that when the high rates start later in 2010, those borrowers may find it difficult to make their payments.

So, to help prevent a housing rise and drop similar to what happened in the U.S. in 2007 & 2008, the federal government is making the following mortgage adjustments as of April 19, 2010:

1. 1. The borrower will have to qualify for the mortgage at 5 year rates, no matter what length of term they are actually using.  This is meant to help the borrower more easily be able to afford higher interest rates upon renewal.
2. 2. When refinancing, the borrower can only borrow up to 90% of the value of a home, although actual home purcahses can still borrow up to 95%.  This will mean that current home buyers will not be able to use as much of their home equity to borrow against in paying down high interest credit card debt.  It also means that if housing prices decrease, the borrower is less likely to owe more than the house is worth. 
3. 3. Anyone purchasing a house to rent out rather than use as their own residence, can only borrow up to 80% of the value of the house.  This means that people wanting to purchase properties for rental purposes will have to come up with a larger down payment than the 5% that was previously in place.

This will make it a little more difficult for people to purchases a house.  The government hopes it stabilizes house prices for a bit, and prevents a bubble that is based on today’s low rates or on price speculation.  Whether it will work or not remains to be seen.  I, personally, hope that these changes do help create something sustainable for the housing market and borrowers across Canada. Jerry