On April 19 our government will lay down three major rule changes to “prevent” a housing-price bubble and keep homeowners from getting “overextended.”

These new rules apply to government-backed insured mortgages only.

5-Year Fixed Qualification Rates

  • The New Rule: Borrowers will need to qualify using a 5-year fixed rate regardless of what term they choose.  If you want a 1.95% variable rate, for example, you will need to show that you can afford payments at a higher fixed rate, like 4.09%.
  • The Government’s Reasoning: “This initiative will help Canadians prepare for higher interest rates in the future.”
  • The Effect: It will now be harder to qualify for a variable-rate mortgage, but not much harder. Most lenders already use three- or five-year mortgage rates to calculate a borrower’s debt service ratios.  For many discount lenders, this means the qualifying rate will go from something like 3.25% to 3.89%-not a huge difference.

90% Maximum Refinancing

  • The New Rule: No longer will you be able to refinance your home to 95% of it’s value. 90% will be the new refinance maximum.
  • The Government’s Reasoning: “This will help ensure home ownership is a more effective way to save.”
  • The Effect: Borrowers will be less able to pay off high-interest debt with lower-cost mortgage money.  On the upside, this rule has the positive effect of keeping equity in the home (which is quite helpful when home prices fall). It also discourages homeowners from relying on home equity to bail themselves out when they accumulate debt.

80% Maximum Insured Financing On Rentals

  • The New Rule: People buying non-owner occupied rental properties will need to put down 20% to get an insured mortgage, versus 5% previously.
  • The Government’s Reasoning: To reduce speculation.
  • The Effect: The number of investors creating rental housing will drop notably. Investors will need to borrow down payment funds elsewhere (assuming it’s allowed) or use higher-cost non-insured lenders to get 90% financing. Note: This rule does not apply to multi-unit owner-occupied homes with rental units (like duplexes and triplexes).

What to Expect:

  • Undoubtedly there will be a rush of applications to beat the April 19 deadline.
  • The government says “Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.”
  • The 80% rental rule will crush the income property financing business for some lenders and brokers.
  • If history is a guide, certain lenders will implement these guidelines early (i.e.  before April 19).

OTTAWA — Amid warnings about “reckless” housing speculation and overextended homebuyers, Finance Minister Jim Flaherty said Tuesday the federal government would make it tougher for people to get a mortgage.

He said at a Tuesday morning media conference that Ottawa would require all borrowers meet standards for a five-year fixed-rate mortgage, even if the buyer wants a variable rate mortgage. This measure would apply to all first-time buyers. Homeowners with insured mortgages are not affected, unless they choose at a later date to extend the amortization or look to refinance.

Other rule changes unveiled would affect people looking to refinance their mortgages — lowering the maximum amount that can be withdrawn to 90% from 95% — and place a 20% minimum down payment for government-backed mortgage insurance on non-owner-occupied properties. This would affect people looking to buy condo units or duplexes for rental income. Previously, only a 5% down payment was required.

But Mr. Flaherty said the changes, to take affect April 19, were not meant to stop a possible housing bubble, as some warned was upon us unless Ottawa was prepared to act.

“There’s no clear evidence of a housing bubble, but we’re taking proactive, prudent and cautious steps today to help prevent one,” Mr. Flaherty said.

The existing home sale market has been on a tear, largely powered by historic low rates. Last April, the Bank of Canada cut its benchmark policy rate to 0.25% and pledged to keep it there until this July in order to stoke economic growth.

Eric Lascelles, chief economist at TD Securities, said the Canadian housing market should continue on a “turbo-charge” ride until the April 19 implementation date, “then cool sharply, and then resume a more modest rate of ascent. In theory, home prices should take a mild hit immediately, as the number of Canadians capable of financing a home will dip slightly. The market’s expectation for rate hikes should be scaled back modestly as housing slows and the need to address it via monetary policy fades.”

Mr. Lascelles added the move will likely add to Canada’s already sterling reputation among currency and bond traders that the country “gets it” in terms of financial regulation.

Mr. Flaherty said the measures would “have some stabilizing effect on the housing market. And stability is a good thing.”

He said the changes should still make housing affordable for first-time homebuyers. His main concern, he added, was that Canadians were at risk of overextending themselves as interest rates are at historic lows and are bound to climb.

“This will help Canadians prepare for higher interest rates. One must always guard against the temptation take on more financial risk simply because interest rates are lower.”

Further, he said data emerged indicating people were engaging in “reckless speculation” by buying multiple condo units and not choosing to live in them. As a result, the Minister decided to move before the March 4 budget, when many people speculated changes might be introduced.

“We are encouraging people to build equity [in their home] over time, using home ownership as an effective way to save – rather than as a vehicle for quick cash,” he said.

The changes “will discourage the kind of reckless real estate speculation that could drive prices to unsustainable levels which does not serve Canadian homebuyers.”

The decision to adopt new mortgage rules emerged after nearly a week of dire warnings from prominent Canadians — such as money manager Stephen Jarislowsky and former Bank of Canada governor David Dodge — that the housing market was on the verge of possible trouble, as price increases were not sustainable and present mortgage rules were too lax.

Frank Techar, president of personal and commercial banking at Bank of Montreal, said the bank supports Ottawa’s moves, although adding the lender does not believe the country faces a housing bubble.

“Given the prospect of higher interest rates and the recent run-up in housing prices in some markets across Canada, the measures announced today are prudent,” Mr. Techar said in a statement.

He said the bank “for several months now” has been encouraging Canadians to stress test their financial budget using a mortgage payment based on a higher interest rate.

The Department of Finance in 2008 said Canada Mortgage and Housing Corp. would limit amortizations to 35 years and offer loan insurance on only 95% of the loan value. The government’s housing agency had offered mortgage insurance on loans worth as much as 100% of the home value and amortization periods of as many as 40 years since 2006.

Homebuyers with a down payment of less than 20% of the property’s value are required to obtain government-backed insurance in exchange for financing.

Canadian home prices and resales will grow to records this year, boosted by low interest rates, the Canadian Real Estate Association said in a report last week. Canadian new home prices rose 0.4% in December from November, the sixth straight gain, according to government figures.

As recently as two weeks ago Mr. Flaherty said there was “no substantial concern” about the emergence of a housing bubble after meeting with private-sector economists. And in an interview with the Financial Post in late December, he said there was “no evidence” of asset bubble in real estate.

In an address last month on behalf of a deputy governor, Bank of Canada advisor David Wolf dismissed talk of a housing bubble in Canada as “premature,” warning that calls for higher interest rates now in an effort to temper real-estate markets would be akin to “dousing” the economic recovery with cold water.

However, the Bank of Canada said addressing housing excesses was best left in the hands of the Minister of Finance, through regulatory changes such as the ones announced Tuesday.

Mark Fidgett | 604-273-2002


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An independent Mortgage Specialist associated with the Verico Mortgage Network.