New Mortgage Rules

This past week the Canadian government announced new changes to the mortgage rules that will take effect July 9th. There has been coverage of these changes in the media but they leave out a few points which I think are key in understanding the impact of these changes on the market.

The changes introduced:

• Reduce maximum amortization period to 25 years from 30 years
• Refinancing now limited to 80% of home equity
• Homes over $1 million no longer eligible for CMHC insurance
• GDS and TDS ratios set to 39% and 44%

Important points:

• These changes are only to CMHC backed mortgages and non bank lenders using CMHC Rules
• Only 11% of mortgages are insured by CMHC
• Most investors do not use CMHC financing
• New buyers will be deterred from entering the market
• Confusion amongst the general public might cause a small rush before new rules kick in but market will cool until the impact is fully realized
• There are still 35 years and higher amortization mortgages available on non CMHC insured mortgages
• Buyers trend away from new construction towards resale homes

If you are a new buyer my advice is to step back and reassess your financial situation. Do not stretch yourself when financing. These changes will save you money in the long run by reducing the interest you pay during your mortgage.

For those investing in real estate not much will change in terms of getting mortgage approvals. The “positive” impact will come in form of more tenants and higher rents. These rules will deter many from becoming homeowners creating a stronger rental market.

The rule changes are a smart way for the government to cool down the market without raising interest rates. Raising the interest rates at a time when U.S and European markets are struggling will have a negative affect on our economy. This change has the same affect as raising interest rates by approximately 1% without the negative impact on the rest of the economy.

One last thing to keep in mind; these changes take us back to 2002 rules. People bought properties at that time and they will continue to buy today. As always remember that it is important to invest in an economically sound area, one with a future and not a past.

Until next Time,

Rasam Hafezi