Mortgage lending guidelines tightened

[Mike Oxlong]

In an effort to crack down on speculators and discourage Canadians from taking on too much debt, Finance minister Jim Flaherty announced some changes to the mortgage lending guidelines today.

There had been some speculation in previous weeks that changes were coming to try and prevent a housing bubble in the Canadian housing market.

However, the changes announced today were not as drastic as expected. There had been talk of increasing the minimum down payment requirements from 5% to 10%, and also reducing the maximum amortization on a mortgage to 25 years down from 35 years. None of those changes were a part of today's announcement.

Here are the 3 main changes in today's announcement:

1. When applying for a variable rate mortgage, you will now have to qualify based on the current 5 year fixed rate. Previously you were required to qualify based on the 3 year fixed rate.

2. People looking to refinance their mortgage will only be able to refinance up to 90% of the value of their home rather than 95%.

3. When purchasing an investment property you will now require a 20% down payment. This is the most significant change as up to this point you were able to qualify for rental properties with only 5% down.

These changes are expected to come into effect on April 19, 2010.

http://money.ca.msn.com/investing/ne...entid=23466177

[Mike Oxlong]

Originally Posted by fotze

The first one actually makes sense, would have figured banks would do something like that anyway.

On point number 3, do banks offer the same rates for investment/recreation properties as they do for your primary residence?

It depends on the lender. Some lenders will charge a premium for rental properties. Usually in the 1/2% range. Other lenders charge the same whether it is your primary residence or an investment property.

One thing I should have mentioned with the rental properties. If you are buying say a duplex or 4 plex and plan to live in one of the units but rent out the other units, you are still able to qualify with only 5% down. As long as you are occupying a portion of the property as your primary residence you can still get away with 5% down.

[ken0042]

Holy crap! What happens if somebody bought a place intended for a rental last month, but it isn't scheduled for completion until 2011? They would need to come up with the other 15% down, or lose the 5% they already put down on it?

I saw a little bit about this on the news, and the finance minister was talking about how Canadians are doing better than the rest of the world with repect to fewer mortgage defaults. I didn't think by the way he was talking that the gov't was going to stick its nose into our business more than it needs to.

Seriously, who does this help aside from CMHC?

[Canada 02]

your link doesn't work

[Kev]

[quote=Mike Oxlong;2339441] 2. People looking to refinance their mortgage will only be able to refinance up to 90% of the value of their home rather than 95%.[/quote]

So let's say a home buyer who's home loses enough value over a 5 year mortgage period to be over the 90% mark would have to come up with extra money to renwe their mortgage possibly?

[fredr123]

3. When purchasing an investment property you will now require a 20% down payment. This is the most significant change as up to this point you were able to qualify for rental properties with only 5% down.

How do mortgage companies monitor this? I know real estate lawyers will have you sign a statutory declaration saying that you intend to reside in this property, it won't be used for any other purpose, etc. Do lenders ever check on this?

[cmyden]

Originally Posted by ken0042

Holy crap! What happens if somebody bought a place intended for a rental last month, but it isn't scheduled for completion until 2011? They would need to come up with the other 15% down, or lose the 5% they already put down on it?

I saw a little bit about this on the news, and the finance minister was talking about how Canadians are doing better than the rest of the world with repect to fewer mortgage defaults. I didn't think by the way he was talking that the gov't was going to stick its nose into our business more than it needs to.

Seriously, who does this help aside from CMHC?

That's inherently the problem we find ourselves with in Canada, government intervention. The CMHC/Government has allowed the banks to lend without risk, which has prevented true free market forces from taking hold.

Basically, what we have here in Canada now is a gigantic socialized housing bubble. Higher interest rates would help deflate the bubble, and let the healing begin, but would wound the large numbers of people that have been viewing their purchase based on monthly payments instead of a soul crushing amount of debt.

So the government's alternative, stricter regulations, gives them the political wherewithal and ability to say, 'Hey, we tried' without actually raising the lending rates before their promised mid 2010 date.

Unfortunately it's all a case of far too little, far too late.

[Mike Oxlong]

Originally Posted by ken0042

Holy crap! What happens if somebody bought a place intended for a rental last month, but it isn't scheduled for completion until 2011? They would need to come up with the other 15% down, or lose the 5% they already put down on it?

I saw a little bit about this on the news, and the finance minister was talking about how Canadians are doing better than the rest of the world with repect to fewer mortgage defaults. I didn't think by the way he was talking that the gov't was going to stick its nose into our business more than it needs to.

Seriously, who does this help aside from CMHC?

That's a good question. I'll see if I can find out if purchases made before April 19 will be grandfathered in.

Yeah I am kind of surprised they are sticking their noses in again as well. In October of 2008 they made some changes that reduced amortizations from 40 years to 35, and also got rid of zero down mortgages. Those changes I don't have a problem with really, I think you should have some of your own equity to be able to buy a place.

The changes announced today are pretty tame compared to what they were threatenting. If they had changed the down payment to 10% on primary residences and decreased amortizations even further to 25 years it would have taken a lot of people out of the market and perhaps hurt the market more than they would have helped it.

Today's announcement makes sense to me. Really they are just tightening things up a bit to try and make sure people aren't getting in over their heads. People really shouldn't be refinancing up to 95% of the value of their home. You need some equity in your house in case prices go down and you do need to sell. Between payout penalties, realtor fees etc... you can easily owe money after you sell your place. Not to mention you shouldn't be using the equity in your home as a personal ATM to buy cars, boats, vacations etc...

Making people qualify at the 5 year fixed rate when they are applying for a variable makes sense. It just ensures they are able to handle the payments down the road when variable rates to eventually start to climb.

For the investment property changes I think they are just trying to weed out the speculators from the serious investors. They are trying to prevent mini bubbles from forming especially in the pre built condo market where people just buy a bunch of units in a building before they even start construction hoping they can flip them for a profit before they even take posession or as soon as they take posession. As we have seen in the Calgary market when prices drop over the construction period lots of people are left owning condos that aren't worth what they paid for them and have to rent them out.

[Mike Oxlong]

Originally Posted by fredr123

How do mortgage companies monitor this? I know real estate lawyers will have you sign a statutory declaration saying that you intend to reside in this property, it won't be used for any other purpose, etc. Do lenders ever check on this?

Nope. Basically you go to the lawyers and sign a document stating that this will be your primary residence. Once that is signed they generally never look into things again.

Who knows if that will change though with these new rules.

[Mike Oxlong]

[quote=Kev;2339513]

Originally Posted by Mike Oxlong

2. People looking to refinance their mortgage will only be able to refinance up to 90% of the value of their home rather than 95%./quote]

So let's say a home buyer who's home loses enough value over a 5 year mortgage period to be over the 90% mark would have to come up with extra money to renwe their mortgage possibly?

No a renewal is different than a refinance. I understand where you are coming from though. Generally the lender who currently has your mortgage won't have a problem renewing it even if the value has dropped. If you try to go to a new lender though there is a good chance you may not get approved with them.

[photon]

I was told by one broker some time ago that he knew of cases where they were checking that they actually took a look to see if the person was living there.

That was at the height of the boom where people were flipping newly built houses and all that.

[fredr123]

Originally Posted by Mike Oxlong

Nope. Basically you go to the lawyers and sign a document stating that this will be your primary residence. Once that is signed they generally never look into things again.

Who knows if that will change though with these new rules.

Guess I'm going to have to make better notes when clients sign that form in order to refresh my memory at the trial for mortgage fraud.

[calculoso]

Originally Posted by cmyden

That's inherently the problem we find ourselves with in Canada, government intervention. The CMHC/Government has allowed the banks to lend without risk, which has prevented true free market forces from taking hold.

Didn't the US have "free market forces", which caused the whole sub-prime market and subsequent collapse?

[Shazam]

Originally Posted by photon

I was told by one broker some time ago that he knew of cases where they were checking that they actually took a look to see if the person was living there.

That was at the height of the boom where people were flipping newly built houses and all that.

Wasn't part of that a check for mortgage fraud as well? I know when I renewed my mortgage some dude from the bank showed up and asked for ID. That or my wife was having an affair.

[cmyden]

Originally Posted by calculoso

Didn't the US have "free market forces", which caused the whole sub-prime market and subsequent collapse?

Yep. A natural cycle.

Here in Canada, we're watching the same movie, but with different actors playing the roles, and we're being treated to the director's cut alternative ending where the main character is kept alive on life support, instead of being allowed to die mercifully.

And up here the pain is likely to be spread out more evenly across the tax base rather than concentrated more fiercely on the ones who chose to partake in the recklessness.

[Potty]

Originally Posted by cmyden

Yep. A natural cycle.

Here in Canada, we're watching the same movie, but with different actors playing the roles, and we're being treated to the director's cut alternative ending where the main character is kept alive on life support, instead of being allowed to die mercifully.

And up here the pain is likely to be spread out more evenly across the tax base rather than concentrated more fiercely on the ones who chose to partake in the recklessness.

I think we'll most likely see a correction, but it's not the slam dunk you make it out to be that we'll have a real estate bloodbath, especially without knowing exactly where interest rates are going over the next couple years. The differences between our situation and the States are as many as the similarities. At the same time, I would be very cautious to buy a place right now that I didn't think I would be in for 5-10+ years.

[Clarkey]

Has this announcement affected rates at all?

[Mike Oxlong]

Originally Posted by Clarkey

Has this announcement affected rates at all?

Nothing that I have seen yet. For now they have stayed where they are.

It is only the first day since the announcement and the changes don't go into effect until April so I don't expect anything for a little while.

If any major rate changes happen I will update my mortgage broker thread in the CP power ring.

[Deegee]

Originally Posted by Mike Oxlong

That's a good question. I'll see if I can find out if purchases made before April 19 will be grandfathered in.

Moving to the New Framework

These adjustments to the mortgage insurance guarantee framework are intended to come into force on April 19, 2010. Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.

http://www.fin.gc.ca/n10/data/10-011_1-eng.asp

Yes to grandfathering in...

[speede5]

So this affects CMHC, but it will just push those borrowers to the self insured companies which tend to take advantage of those who can least afford it.