Jim Flaherty announced changes to mortgage rules in Canada on February 16th, 2010 which are to take effect on April 19th, 2010. Here is a list of the changes:
- Borrowers will be tested on their ability to make payments on a five year fixed-rate mortgage, even though they may choose different terms (e.g. a three year variable mortgage). Currently borrowers are tested against a three year fixed rate mortgage. This means people will qualify for lower maximum mortgage amounts. This will protect people from taking out larger mortgages than they can really afford. What some people are doing is opting for variable mortgages (with lower payments) and this exposes them to the risk that gradually increasing interest rates over time (because interest rates can really only go up from here) will make their mortgages unaffordable later on because they bit off more than they could chew up front.
- The maximum a mortgage can be refinanced has been lowered from 95% to 90% of the value of the home. This reduces how much a borrower can tap into the equity of their house. Again this will curb the ability of people to stretch themselves too thin.
- Mortgages for homes in which the borrower will not occupy will now require a 20% down payment. It was 5% previously. This reduces speculation in residential real estate since borrowers now have to put up serious money in order to buy.
It should also be noted that these rules apply to those seeking CMHC insured mortgages (or an equivalent private sector mortgage insurer). So if you can find someone willing to offer you an uninsured mortgage you don’t have to worry about these rules.
In the end these seem like very prudent moves by Flaherty. The government doesn’t need to risk dollars insuring risky mortgage behaviour and those who are overextending themselves unwisely. In addition, these measures will hopefully make the Canadian lending industry that much more resistant to what happened in the United States in 2008.