New Mortgage Rules for Canada

[TimLacroix]

On Monday October 4th, Canada's Federal Finance Minister Bill Morneau has blind sided not only the Real Estate, Mortgage Industry and consumers... it appears that other stakeholders were surprised at the announcement too (it appears that insurers and lenders were not consulted and unaware of the impending change).

The Department of Finance (DoF) was looking to slow down the housing market and they may have just done it with these changes, in a big way. The rules will hit the mortgage market hard, but consumers will take the brunt of it. The two big changes are:

1. Effective Oct. 17, the qualification rate (currently today at 4.64%) will now apply to all insured mortgages (regardless of LTV, which is not the case today).

2. Regulators are banning a wide array of mortgages from being insured, effective Nov. 30 (see below).

In Calgary, Edmonton and pretty much most of Alberta, the timing of this announcement could not have come at a worse time. It's like getting kicked in the teeth while you were already down. This change will make homeownership less attainable for the marginal borrower, which is often younger Canadian first-time home buyers.

Consumer Choice

These changes are also going to take away choice for consumers as the majority of lenders that compete with the banks are now going to have a tough time with the following due to the changes for mortgages with more than 20% down payment or equity:

- Refinances
- Large Mortgages on Purchases over $1M
- Rental / Investment Properties

By forcing all insured borrowers to qualify based on the posted rate of 4.64% instead of the actual negotiated rate, the changes are the equivalent of a jump of 2% in mortgage rates. Time will tell how many people will be forced out of the market but it is suspected that it could be 15 to 20%.


It is still too early to determine the full nuts and bolts of the changes as the lenders and insurers are still reviewing the changes and will likely be planning a meeting with Department of Finance (DoF) to raise concerns and clarification on the rules. This could spell trouble for consumer choice and competition for mortgage products, rates and overall solutions.



This is a complicated situation and can affect many people. If you have any questions or concerns please reach out, I’d be happy to clarify the new changes.

[kaput]

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[TimLacroix]

Originally posted by kaput
How are renewals affected? Do they also have to qualify at 4.64%?

Renewing your mortgage is going to be very similar to todays renewals. There will essentially be 2 options:

1 - Renew with existing lender. No qualifying required unless lender requests documents etc... typically does not happen unless there is a history of missed payments.

2 - Renewing and Moving to another lender due to product, rate etc. This will likely require qualifying at Benchmark Rate which today is 4.64%. The majority of renewals these days are going to be okay with this factor.

* Keep in mind that if you have a variable, or terms less than 5 years, you have already been qualifying at the Benchmark Rate. It is the 5 year fixed terms or higher that have not followed this qualifying rate.

[Disoblige]

I was a bit confused initially as I wondered why something almost 2 month old is posted as new mortgage rules. This is kinda old, no?

[TimLacroix]

Originally posted by Disoblige
I was a bit confused initially as I wondered why something almost 2 month old is posted as new mortgage rules. This is kinda old, no?

Not really old. While the NEW rules were announced in Oct, not all the changes went into effect. As well, some of the rules and details were not fully defined or clear.

It is important to note that the changes were dumped onto the Lenders, Insurers and industry without warning or consultation and not fully defined.

There were changes in Oct, another set of changes happening at the end of this month and an additional set of changes happening Jan 2017.

[ExtraSlow]

Sounds like typical government BS. Inadequate consultation of affected businesses and consumers.

[blownz]

I still don't think this is a bad thing. It will only hurt people trying to borrow the max amount possible in the short term (and to be honest, it is good not to borrow as much as possible). Longer term, the market will adjust and the same amount of people will be able to afford a home as can now.

For the last 15 or so years that rates have been dropping, housing has been increasing as people can "afford" more. Rates going up will have the opposite effect, no matter how they increase. House prices will either drop slightly, or just increase at a slower rate for the next while.

[cdnsir]

Thanks Tim, this is really interesting.

What happens in a move-up plus rental scenario? I move all my equity from my current property and use it towards a 20% down on the new one. So no changes really on this transaction.

What happens to the my previous property that I plan to use as a rental? Do I need to refinance, and when I do and now that I don't have 20% there anymore, would I now be forced to sell?

[TimLacroix]

Originally posted by cdnsir
Thanks Tim, this is really interesting.

What happens in a move-up plus rental scenario? I move all my equity from my current property and use it towards a 20% down on the new one. So no changes really on this transaction.

What happens to the my previous property that I plan to use as a rental? Do I need to refinance, and when I do and now that I don't have 20% there anymore, would I now be forced to sell?

Going to PM... Tim

[Feruk]

I'm a big supporter of rules like this. They'll soften the blow of any sort of mega-correction when rates start to rise again. And if it prices some people out, good, that's what it's meant to do.

[Xtrema]

Originally posted by ExtraSlow
Sounds like typical government BS. Inadequate consultation of affected businesses and consumers.

Originally posted by Feruk
I'm a big supporter of rules like this. They'll soften the blow of any sort of mega-correction when rates start to rise again. And if it prices some people out, good, that's what it's meant to do.

Unfortunately, the cancer is in Toronto and Vancouver and this is basically government administrating chemo to cure cancer.

We are working towards a similar crash as US in 2008. You have to do something because we don't have the influence to print money like US to get ourselves out.

Even as a landlord, I support this move because while it slows growth, at least we won't have a 20%+ equity adjustment in a bubble burst scenario.

The potential downside probably won't be felt for another decade or 2 because millennials which CMHC supposed to help out are crippled with student loans and can't start ownership early enough as it is. So that also means there will be less people to hand your properties off to in the future. Or the 15-20% we lose will be replaced by foreign buyers or buyers with access to foreign funds and we chug along, who knows.

So far neither Toronto or Vancouver prices are coming down even with these measure even # of transaction slows.