What do the new mortgage rules mean for the Canadian home buyer?

On July 9th the new mortgage rules announced by Finance Minister Jim Flaherty will be officially implemented. However, already by July 4th, if you don't already have a deal in place, it may be extremely difficult to have CMHC approve your 30-year amortization in time. So going forward, let's assume that the 6-year Government of Canada project of insured 30, 35, and 40-year mortgages are done.

What does this mean for you?

Well, here are the new rules:
1. Reduce the maximum amortization period from 30 years to 25 years
2. Reduce the maximum loan to value (LTV) ratio on refinances from 85 per cent to 80 per cent
3. Insurance is limited to homes with a purchase price of less than $1-million
4. Maximum gross debt service ratio (GDSR) fixed at 39 per cent and total debt service ratio (TDSR) fixed at 44 per cent

Target: Red hot markets, notably Toronto (for those who have been following, Vancouver has already begun a major reduction in sales, around 27% compared year over year (June) - true to the real estate cycle, prices will come down.

Those really hurt: New home buyers in both high unaffordable centers and surrounding suburbs. Current homeowners with some equity will merely buy something smaller. New home buyers trying to get their foot in the door will be forced to either raise kids in smaller condos or put off home buying altogether.

How will this effect YOUR budget?
Well, let's assume a $400,000 purchase price with 5% down at a great 5-year fixed rate of 2.99%. On a 30-year schedule, this would be $1,596.27 per month. On a 25-year schedule, this is now 1,796.38. Add your many other costs of home ownership and you can see how this will put many buyers out of the market.

I have 20% down payment, how will this effect me?
It doesn't. You can still receive a 30-year amortization.

Why are they doing this to me?
In 2006 the new Government wanted to allow more competition in the private home insurance market and bumped the max. amortization rate from 25 years to 40 and allowed for 0% down mortgages. Already rising prices skyrocketed out of control for 2 years until a worldwide economic collapse and the major housing crash south of the border partially due to a highly unregulated lending industry.

Ever since 2008, the government has been slowly returning the industry back to where it was. Unfortunately, because of the extreme prices, you can't just press a reset button. Problem is, because of "cheap money", Canadians have over-extended themselves. Granted, "cheap money" backed up by an asset is safer than that sitting on a credit card for those new shoes you bought. However, considering your principle property an asset is arguable and a high loan-to-value ratio makes a homeowner vulnerable to many external factors.

The fact is, we all know that the prime rate will increase, bringing mortgage rates up along with it. If Canadians have budgeted themselves more than they can actually afford at a dirt cheap rate in 2011, what happens when they renew at more reasonable mortgage rates? Remember that great 2.99% rate at 30-years? Well at the reasonable rate of 4.99%, on the same schedule, that $1,600 monthly payment would now be $2,025. Did you budget for that?

The Government has only so many instruments to play around with the market and they just marched out the mariachi band to do everything to keep Canadians from being shocked when those interest rates go up.

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By now you've heard hear or elsewhere that Canada will be faced with new/old mortgage rules as of July 9th.

Economists are calculating that these rules are effectively adding 1% to today's interest rates and the Finance Minister has admitted that his decision came based on witnessing Toronto's booming market.

Yes, this will especially effect first time home buyers and already analysts are predicting the move will hurt those in communities throughout Canada just recovering from 2008 moreso than Vancouver/Toronto (ie. Abbotsford/Chilliwack).

Yes, this needed to be done. The troubling aspect of this, however, is that in 2006 we were on a healthy growth cycle. Back then, there was no such thing as a CMHC-backed 0 down mortgage or 30-year amortization. Home prices were rising, but were doing so because the market was healthy.

In May 2006 the newly elected government introduced the government-insured 0-down, 40-year mortgage in a move that was heading towards an American-like sub-prime system. Between 2006 and 2008 home prices skyrocketed as those who previously could not afford homes could now stretch out their budget.

In 2008 the American and Canadian housing market collapsed, but due to a centralized banking system, and years of financial prudence in the 90s and early 2000s let Canada escape the worst of it.

But while Vancouver and Toronto bounced back, the media paid no attention to the majority of Canadian markets. As Vancouver went back to multiple bids and skyrocketing prices, no articles were written about outlying suburban homeowners who were losing upwards of 20% on condos they bought just 1 year earlier due to an oversaturated market.

Furthermore, the current spin is that this move back to 25-year mortgages is in the name of financial prudence. It is actually an admittance of wrong-doing by the current government. After instigating an unhealthy market, the government has rapidly moved to undo their original 2006 budget, effectively admitting their irresponsible actions.

If you have any questions regarding the new mortgage rules, please contact myself and I can certainly answer them or have one of my mortgage experts get into the technical details and/or help you beat the new rules.

***The opinions above are those of my own and do not represent those of Macdonald Realty or Macdonald Realty 1st Pioneer.***

See Facebook page comment section for links regarding the new rules.

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