Changes to Mortgage Financing Rules

Today Canada's Ministry of Finance, Jim Flaherty, announced three new changes to the rules regarding mortgage financing:

1. All borrowers must qualify at the 5 year fixed mortgage rate regardless of whether or not they are taking a lower term or rate;
2. For refinancing, the maximum on owner-occupied homes that can be advanced is 90% versus 95% previously;
3. Minimum downpayment for speculative (non-owner occupied) financing is now 20% for all government backed insured mortgages (e.g. CMHC).

These changes have come about as a means to slow growth in the housing market.  With the current low mortgage rate environment there is some concern that prices and debt levels have increased too fast.  With the threat of increasing rates in the 3rd quarter, consumers may not be able to afford the increase in their mortgage payments (variable rates in particular).  By tightening the requirements for mortgage borrowing, there is hope that Canadians will use their house as a savings vehicle and not a speculative investment.

These changes take place on April 19, 2010.

As an ex-banker, I can only applaud these changes.  I think making individuals have more at stake in their investments (homes) leads to a more stable environment.  On the plus side, should house prices  continue to increase in value, individuals will have more equity (savings).  While on the negative side, should house values decrease, individuals have a 10% cushion before they owe more than the house is worth.  It is much harder to walk away from your home if you have put your own savings into it than if you have borrowed it all. 

The first house we bought was in 1989 during a real estate bubble and 2 years later we walked away with $50K less than what we had paid.  A very hard lesson to learn, but even more costly had we put 5% down because we would have been more than $60K in the hole by the time the dust settled.