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New Mortgage Rules Won’t Help Toronto’s Condo Market

24 June 2012

When Jim Flaherty made his announcement about the most recent mortgage rule changes on Thursday, he said, “I remain concerned about parts of the Canadian residential real estate market, particularly in Toronto but not only in Toronto.” And while it’s no secret that there’s an influx of people seeking Toronto mortgages, and a number of properties in the big city still being built, something needs to be done. But are these new measures the ones to fix everything in Canada’s largest city?

Likely not, says experts, considering that the new rules don’t really apply to the condo market. “There’s a lot of confusion right now, both among those who have a mortgage and those looking for one,” said Toronto mortgage broker Kelvin Mangaroo.

The problem, says Tridel vice president Jim Ritchie, is that anyone buying a condo right now needs to put up the full 20 per cent down, because developers (such as Tridel) need to sell 70 per cent of their units, and show that those buyers are going to make payments, before lenders will approve them for a construction loan. Mr. Ritchie also says that it’s resale homes that only require the 5 per cent down, and so it’s only these homes that will be affected by the new rules.

But there’s one thing Mr. Ritchie’s forgetting – the new rules didn’t touch the down payment issue; and many other experts are happy they didn’t, thinking that would send us into a total housing collapse.

What the new rules did touch on was mortgage insurance – something that’s been a hot topic in Canada ever since the Crown corporation reported it was closing to hitting its ceiling for the amount of insurance it could offer. And while mortgage insurance is directly tied to down payments, condo buyers could still put up the 5 per cent down, pay mortgage insurance, and the condo developers would still have that unit as “sold” on their books when it’s time to get their own loan with the bank. The only difference is that now, the buyer will have a 25-year mortgage instead of a possible 30-year one.

Mr. Ritchie also says that nearly all developers require 20 per cent down at the pre-construction phase, but how realistic is that number? With more condos going up every day in Toronto, and more buyers coming onto the market for them, how likely is it that every single one of those buyers has 20 per cent down? Especially when, at the same time, CMHC is handing out more mortgage insurance than ever?

Will the new mortgage rules affect Toronto’s condo market? Just as they’re intended to, yes they will. Will it totally wipe it out? No. As Mr. Flaherty said, the new rules will only affect about 5 per cent of homeowners in Canada – all the while protecting the rest of us.

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