On Tuesday, February 16th, Finance Minister Jim Flaherty announced new rules that are aimed at preventing home buyers from getting into financial difficulty when mortgage rates increase. After consulting with major Canadian lenders, Flaherty outlined a new plan set to remove the speculation from the housing market. "There is no evidence of a housing bubble, but we're taking prudent steps today to prevent one," he said at a news conference in Ottawa. "If some lenders aren't willing to act themselves, we will act."
Broadly speaking, the plan unveiled has three components to be implemented by April 19, 2010:
- All borrowers must meet the standards for a five-year fixed-rate mortgage, even if they choose a variable mortgage with a lower rate or a shorter term.
- The maximum Canadians will be allowed to withdraw from the value of their home when refinancing their mortgages will now be set at 90%, down from the previous mark of 95%.
- A minimum down payment of 20% is required to qualify for CMHC insurance, for non-owner-occupied properties purchased as an investment.
So what does all this mean to you the buyer?! Let's take a minute and break it down, point by point.
5 Year Fixed Rate
- This new rule safe guards the market against higher interests in the future.
- Ensuring that individuals can manage a higher 5 year fixed mortgage rate, allows lenders to offer better rates with higher level of security.
For Example- If you were looking to purchase a new home, and the current 5 year fixed rate posted by your lender of choice is 5.99%, the lender would attempt to qualify you at the 5.99% rate. Once this is accomplished you would have the option to negotiate with your lender, a shorter term and possibly a lower interest rate, fixed or variable. Of course this is all subject to your individual credit rating and financial status and your lender may choose to only offer you the posted rated.
*In the case where you do not qualify for the posted 5 year rate of 5.99%, you could not take advantage of the variable rate.
- This new rule reduces the financial risk to yourself and the lender.
- By refinancing less than previous allowed you as a home owner will be protected from over extending your mortgage and yourself. Too many people draw the maximum allowed and find that they cannot afford to pay for other life necessities.
20% Down Payment For Investment Properties
- This new rule will indirectly affect you in a positive way by helping to keep property values from being artificially set.
- Many people, who have bought multiple properties that are not considered their primary residence, have done so on speculation that market values would increase. This creates a false market value and in the end you as a buyer will be forced to pay more.
- As well, these properties are typically rented out for short periods of time which also could affect the value of the neighborhood, if more properties were rented, rather than owned by the occupants.
There had been speculation the Department of Finance might implement legislation raising the minimum down payment from 5% to 10% of a home's value, or reduce the maximum amortization period from 35 years to 30 years. These measures were not part of Minister Flaherty's announcement, but all options are still on the table.
It seems that the April 19 date for implementation is actually likely to cause more short-term stimulation of the market, as people scramble to get in under the deadline.
Due to these upcoming changes, there has been increased activity on the buyers' side of the market, while there still remains a shortage of inventory on the sellers' side.
So ask yourself this question...if your thinking about buying a house in the next 6 months. Will I benefit by acting before these new rules are in place and HST (Harmonized Sales Tax) kicks in on July 1st? The answer is simple...YES!