Financial Power

The Canadian housing bubble might really cool down as the Canadian government has made changes to the mortgage lending rules. The new changes are to take effect on April 19th, 2010.

Now when interest rates are at historic low, home buyers are purchasing homes often without careful consideration about the effects of higher interest rates, especially when interest rates start to rise in the near future. Most buyers will go with the smallest possible down payment and the longest possible amortization.

Here is a list of the changes:

1. When applying for mortgage, borrowers will be tested on their ability to make payments on a five year fixed-rate, even though they may choose different terms (like a three year variable mortgage). This means people will qualify for lower maximum mortgage amounts. This will protect people from taking out larger mortgages than they can really afford.

2. When refinancing, borrowers can only go up to 90% of their equity instead of the previous 95%. This reduces how much a borrower can tap into the equity of their house. Again this will help minimize the number of those who are overextending themselves unwisely. If refinancing, I usually recommend to only borrowing up to 80% of the equity as it avoids the CMHC premium anyways,

3. Mortgages for investment properties will now require a 20% down payment. It was 5% previously. This reduces speculation in residential real estate since borrowers now have to put up serious money in order to buy. This one is by far the biggest shocker of the new rules as it now makes a lot of rental properties “unaffordable” to investors.

I don’t think that the new rules are overly drastic, with the biggest change being the new investment property borrowing rule. I’m of the opinion that the borrower should take responsibility for the amount that they borrow on a home or on an investment. These new rules by the government will hopefully make the Canadian lending industry that much more resistant to what happened in the United States in 2008.

Share your thoughts on the new mortgage rules.

Related posts:

1. What the Rate Cut Means for Mortgages

Tags: Mortgage

This entry was posted by FP on Sunday, February 21st, 2010 at 9:23 PM and is filed under Mortgage. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.