Canadian Government Tightens the Bolts on Mortgage Lending
In light of today’s announcement by the Ministry of Finance, people looking to refinance their mortgage should act fast. New regulations on government-insured mortgages, discussed in detail below, come into effect April 19, 2010 and they will have a serious impact on borrowers.
In a press release today announcing the changes to mortgage lending rules, Minister of Finance Jim Flaherty conceded that there is no housing bubble in Canada. He also noted that the International Monetary Fund (IMF) believes our housing market is “supported by sound economic factors” including low interest rates, rising incomes, a growing population and a low incidence of mortgage arrears.
Still, the Minister believes that it is time for some proactive action to “prevent negative trends from developing.” Is he preparing for a crash? We’re not sure, but all homeowners need to be aware of the key changes. We have summarized them below.
Borrowers Must Qualify for the Five-Year Rate
The first change requires that all borrowers meet the qualifications for a five-year fixed rate mortgage, even if they are borrowing at a lower rate and for a shorter term. The intention here is to ensure Canadians can manage their mortgage payments when interest rates rise in the future.
Under the new plan, it is variable-rate mortgages that will be most dramatically affected.
When assessing a borrower’s qualifications for any kind of mortgage, lenders need an interest rate to calculate the total carrying cost of the mortgage. With variable-rate mortgages or those with terms shorter than three years, lenders use the greater of the contract rate or the prevailing three-year fixed rate. After April 19, borrowers will need to qualify for their mortgage amount using the greater of the contract rate or the interest rate for a five-year fixed rate mortgage – even if they are taking out a mortgage for a shorter term.
New Limits on Maximum Refinancing Amount
This change is the one that could hurt the most, especially for borrowers currently living on the edge. Where borrowers used to be able to refinance up to 95% of the value of their home, the maximum limit will be lowered to 90%. With this measure the government is trying to encourage home ownership as a means of saving money but in the process, they are impeding homeowners’ ability to use the equity in their home for other purposes.
Minimum Down Payment of 20% Required for Non-Owner Occupied Homes
In an effort to discourage speculation, the government is now requiring a minimum down payment of 20% for government-backed mortgage insurance on non-owner-occupied residential rental properties – a marked increase from the current minimum of 5% down. People who buy a property but rent out a portion and live in the other can still access government-backed mortgage insurance with a 5% down payment.
Act Now to Refinance
These new regulations will come into force on April 19 of this year, although exceptions will be allowed for refinancing agreements signed before April 19.
Our advice to anyone looking to refinance – whether to consolidate debts or take advantage of lower interest rates – is to do so now. With only two months until the new regulations take effect, time is running out.
