The latest mortgage rules: the good, the bad and the ugly and how it will impact your own mortgage
The Minister of Finance, Mr. Flaherty, announced today the following regarding insured mortgages which will take effect on July 9, 2012:
- Refinances will be limited to 80% of home value from 85%
- Maximum amortization will be lowered to 25 years from 30 years
- GDS limited to 39% (currently no GDS requirement for 680+ credit scores) and TDS to 44%
- Mortgages over $1 million will no longer be insured
Here is how these changes will impact the following groups:
First Time Buyers
- They will be squeezed out of the market if they don't have the 20% downpayment. Qualifying at 25 years, especially in Toronto, is difficult due to home prices in the city (condo fees are taken into account when qualifying for a mortgage as well)
- More potential first time home buyers will turn into longer term tenants which is good news for real estate investors
- Parents, get ready to co-sign for your children if they want to buy their first home
Real Estate Investors
- Since more first time buyers will have to wait for their first home, the tenant pool will increase. This is good news since more demand results in higher rental income
- Qualifying for additional investment properties should not change since government requires minimum 20% downpayment. This is pending conventional mortgage amortization is not lowered to 25 years. Please note there are lenders offering 35 year amortization for investment properties.
- If one has 20% equity or more in their home, 30 & 35 year amortized mortgages are available for now. The changes are not impacting this group, but we will have to wait and see if lenders will reduce mortgage amortization to 25 years
This announcement came out of nowhere and it surprised many. If this announcement is intended to cool off investors buying condos in downtown Toronto, I'm not sure it will achieve that since the changes are targeted towards insured mortgages only. Furthermore, this change gives the Bank of Canada room to hold its benchmark rate steady for a longer period of time due to a slowing global economy. I believe since the Bank of Canada's hands were tied, Minister of Finance came in to help control the high household debt level.
There will be more clarifications coming out in the next few days from the lenders which I will elaborate on. To discuss how these changes will impact your mortgage financing, please contact me.