Here is an explanation of the new mortgage rules:
OTTAWA — Jim Flaherty, the Finance Minister, says he is targeting reckless’ speculators who buy up multiple condominium units in the country’s biggest cities with new rules introduced yesterday that will make it tougher for Canadians to get a mortgage….
The measures will not affect the ability of a Canadian family to buy a house. It will affect those who are speculating,’ the Finance Minister said. What we’re getting at is the speculation in multiple condominium units in particular which we see in Vancouver, Montreal, Toronto and in some other places in Canada.’
Home builders were taken aback by the measures introduced, saying they could result in severe implications’ for the condo and housing markets.
The changes, scheduled to come into effect on April 19, will make it harder for first-time buyers to qualify for government-backed mortgage insurance — from either Crown agency Canada Mortgage and Housing Corp. or private-sector providers — which is required if down payments are less than 20% of the property’s value.
Borrowers now have to meet standards for a five-year fixed-rate mortgage, even if the buyer wants a shorter-term, variable rate product.
Some analysts, however, indicate the shift is not as big as it appears. Eric Lascelles, chief economist at TD Securities, said the revamped rule likely means the minimum household income cutoff for Canadian mortgage applicants would be about $5,000 to $8,000 higher.
Further, Ottawa has raised the minimum down payment on rental income properties — where the buyer does not plan to live — to 20% from 5%.
Mr. Flaherty said one goal is to protect Canadians from overextending themselves financially as interest rates are likely to climb from present historic lows. The other, he added, is to root out speculation in real estate, which he suggested was happening with greater frequency based on prebudget consultations….
SUMMARY OF CHANGES
*Borrowers must qualify for a five-year fixed rate mortgage instead of a three-year loan when calculating gross debt service and total debt service ratios.
*Refinancing will be capped at 90% for government-backed high-ratio mortgages versus 90% previously.
*A down payment of 20%, instead of 5%, will be required for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.
WHAT CHANGES MEAN FOR A $337,000 HOUSE
*The difference between a three-year mortgage rate and a five-year mortgage rate is currently in the range of about 50-100 basis points. The average house in Canada costs $337,000, which means that this change will require that mortgage applicants have the capacity to absorb an extra $2,500 per year in mortgage costs than in the past, according to calculations by Eric Lascelles at TD Securities. Effectively, the minimum household income cut-off for Canadian mortgage applicants is now about $5,000-8,000 higher than it was previously, to fulfill the new rule.