As widely reported yesterday, Minister of Finance Jim Flaherty tightened the rules on qualifying for a mortgage today. It was not as bad as many had feared (increasing the downpayment to 10% etc.) but it will definitely still have an effect on the overall housing market. Here are the rule changes:
1. Regardless of mortgage product all borrowers must meet the standards for a 5-year fixed rate mortgage. This includes if a borrower wants a variable rate product.
2. When refinancing a home and doing an equity take out, the maximum one can borrow will be 90% LTV.
3. A minimum downpayment of 20% on all non-owner occupied properties.
All changes take effect April 19, 2010.
Let me address each point and what I believe the impact will be:
1. Most lenders currently use their 3 year fixed rate to qualify clients on variable rate mortgages. The thing that is not clear in the press release is what is meant by “the standards for a 5 year fixed rate mortgage”. Does this mean the bank’s posted 5 year rate? Will the government set the 5 year rate? Some lenders do not have “posted rates” (Firstline Mortgages as an example) and currently use their 3 year “best rate” to qualify clients. Will this new rule translate to having them use their own 5 year “best rate” or will they have to qualify clients based on an arbritarily set 5 year rate? The difference between the two will determine the impact. If it is just a matter of using each lender’s own 5 year fixed rate for qualifying then a borrower will be able to qualify for more money via lenders that do not a higher “posted rate”. This will have the least impact. Now if the “standard 5 year fixed rate mortgage” is arbitrarily set this will mean that the borrower will qualify for much less, even from the lenders that have no “posted rates”. We will have to see once this is clarified.
2. Limiting refinances to 90% LTV will have the least impact of the 3 new changes I believe. It is currently rare, based on my experience, to have clients re-borrow up to 95% LTV.
3. Requiring 20% downpayment for all non-owner occupied properties will have the most immediate significant impact in my opinion. With current low interest rates and the recent price declines in most areas (now back up in the Vancouver area) we had seen more investors in the market. Although, small downpayments are still not the norm for these clients we have seen an uptick in investors with smaller amounts down. This will take these clients right out of the market. I personally think that this is a solid change. If one is to invest/speculate on real estate one should have more money put into the property. It should not be the insurer or the bank that is a potential “partner” in it.
Overall, these changes will mean pains for some. However, if change #3 has the impact as I think it will, this will mean that prices should stabilize or at least slow it’s rise in most markets. Bad news for current owners but great news for those in the market.
What do you think? Comments welcome.
The full press release can be viewed here.