Over the past few years we have seen a large number of mortgage rule changes.
• Maximum amortizations decreased from 40 to 25 years.
• Terms less than five years required a borrower to qualify at a higher interest rate.
• Refinances capped at 80% of a property’s value.
• Income for self-employed individuals had to be more verifiable.
• Increased down payment for homes over $500,000.
And the list can go on and on. We have heard rumors since March of this year that another round of rule changes were coming through but we were not 100% on exactly what they would entail.
The hot real estate markets and ever escalating prices in Vancouver and Toronto have been a great concern to the government. Couple that with the lousy economy in Alberta and arrears rates which are rising and the federal government has deemed it prudent to add additional mortgage lending rules.
Why are they even worried about it you may ask? The reason is simple, they are heavily invested in our real estate market. CMHC stands for the Canadian Housing and Mortgage Corporation which is owned by the federal government. They are issuing insurance policies that they are potentially going to have to cover losses on from taxpayer’s money if/when people stop paying.
Say your neighbour bought their house with 5% down and has lost their job and can no longer make the payments so the bank steps in and forecloses. CMHC, and the other mortgage insurers, have guaranteed that they will step in and cover any monetary losses incurred by the bank. This means that the government and therefore all of us are literally heavily invested in the real estate market and at risk if it crashes.
On Monday Oct. 3rd the Ministry of Finance announced three more things.
1. Mortgage stress test.
As of Oct. 17th, all insured mortgages, regardless of term or type, will be required to qualify at the Bank of Canada posted rate.
To put that in perspective.
– Family income $80,000.
– Monthly debts $500
– Property taxes $3,500
– 25 year term
(Qualification rate today is 2.39% and after will be 4.64%)
Today that family can buy a home worth approximately $393,000 but after Oct. 17th that drops to $310,000. That is a large decrease to say the least.
The rate you pay will not change, just the interest rate we have to use to qualify you for the loan.
Mortgages with a loan to value of less than 80% were not subject to the same stringent rules as those with less than 20% equity. As of Nov. 30th that will change and mortgages will all be subject to the same lending criteria.
2. Closing loopholes and managing tax fairness
There is a proposed change to the tax laws on the table as well. They want to make sure that the Capital Gains tax exemption on a primary residence is not abused by either residents or non-residents buying and selling a primary residence within the same year. This is in all likelihood an attempt to cool Toronto and Vancouver markets.
3. Managing risk and protecting taxpayers
The final piece in the announcement is a little bit unclear as to exact ramifications. Currently CMHC and the other mortgage insurers take on all the risk associated with mortgage default. They are planning to implement a consultation process on a policy option where mortgage lenders would have to manage a portion of their loss. We will have to wait and see what exactly happens from here.
So there you have it. Getting a mortgage just got even harder and it doesn’t matter if you walk into your trusted branch or go through a mortgage broker. The rules have changed for us all.
I cannot stress enough the necessity of making sure you speak to a well-qualified mortgage professional before you make any decisions about buying or selling in case you are one of the folks affected by these changes. I will keep you up to date on any changes which come down the road.
Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.