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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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Upon referring a persuasive book to a good friend of mine, she admitted that she could be easily convinced of a wide range of ideas from any well-written book, whether it was “right” or not. This was a moment of honesty very few people can even admit to themselves, much less to others. Sometimes we agree with something we have read because we want to agree with it, or maybe it just “feels” right, or maybe it is actually true. The fact is, none of us have the tools to be experts in everything, but the problem is that we almost need to be experts in which “experts” we can trust. My first rule is if someone calls him or her self an “expert”, he or she usually isn’t.

 

Real estate speculation almost seems like Vancouver’s official sport. Everyone has an opinion and everyone seems to be an expert. It is safe to say that even in the last few years of troubling economic times, Vancouver has been the hottest market in Canada, and probably in the top 10 in North America. At times it can seem insane. Maybe it is. But this market has led to two speculating camps, both using what I call “funny math” to prove their point.

 

Don’t get me wrong, they are both convincing. Problem is, they are so convinced that they are right, that they ignore everything the other side says, when the truth likely lies somewhere in the middle (or is utterly unforeseeable either way). The two camps I speak of, in regards to real estate speculation, are the utopians and the doomsayers. Utopians believe that the market will forever keep rising and rising – there may be small corrections along the way, but Canada will always be safe and steady for real estate investment. Doomsayers, on the other hand, are always calling for the biggest collapse in real estate history – unaffordability cannot be sustained and the market is sure to dive at any moment.

 

Unfortunately, as real estate professionals, we sometimes get caught up in the speculation. It sometimes seems natural that we should should give our opinion on the future of the marketplace. But we shouldn’t. While we are professionals, we are also salespeople held to a code that we must put our client’s interest before even our own. It is almost entirely against our benefit to forecast a poor market. So when was the last time you heard a real estate agent say that he or she believed a downturn was coming? Utopians will usually quote population projections and livability quotients.

 

On the other hand, doomsayers generally advocate that their followers should rent until judgment day, when all the greater fools will get what is coming to them and those who waited can pick up the pieces of a crashed market (like many Canadians did on American soil). Doomsayers quote household and government debt numbers, unaffordability ratios and rising mortgage rates.

 

Unfortunately for both camps, they let their passion blind them and ignore the balance of the two. What ends up happening is that the general public doesn’t know who to trust. You can’t ignore the numbers of either. This isn’t a zero-sum game. You can’t tell people for 10 years that the market is going to collapse any day and expect credibility to last forever. You also can’t paint rosy pictures when history has continually shown the reality of real estate cycles, and the subtle or not-so-subltle warning signs for market corrections.

 

So do your own research and follow the money. You want to invest in real estate? Talk to a real estate investor who actually makes money buying and selling real estate. Not an author. Not someone who lives in New York or someone who wants to sell you something (like a book or membership to some exclusive club). Talk to someone you know has seen the market rise and fall. Want to buy a home? Understand that if you sell in the peak of the market, you will probably buy in one too. Same with a slow market. Don’t play the game. Buy and sell what you need. Get a good deal and let your REALTOR® do what they do best – sell your home for the best possible price and find you a home that matches your needs. They can inform you honestly about the past market and the current market – but REALTORS® are not soothsayers.

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