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More New Mortgage Tightening Rules

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Three times the Federal government has tightened up mortgage lending rules for those people with less than 20% down payment. Now they’ve made it much harder for those of us with equity of more than 20% to re-mortgage or to buy a new home as well.

I’ll join the economists, along with the Fraser Institute, who think this new stress-test has gone way too far, and will have a measurable impact on home sales, and most of us being able to qualify for a mortgage starting January 1st.

Here’s the new rule: No matter how much you earn or how much down-payment you have, you need to qualify for an arbitrary five-year posted rate. Right now you can get a 5-year rate of under 2.8% but you still need to qualify for the 4.9% sticker rate. Stupid but true. A family making $100,000 with 20% down can afford a home worth $726,000 right now. With the new rule, that same family’s purchasing power is down to a $570,000 home. That’s a $150,000 lesser mortgage or lower priced home.

Yet this is a family that has over 20% equity and certainly not someone who’s in any trouble of being foreclosed on. Still, they have to qualify on the “pretend” rate of 4.9%. That would be SEVEN rate increases, and that’s something we’ll never see!

If you’re not making $100,000 and are not totally debt free, you’re never going to qualify for any home that’s even the average price! In my case, I need to sell my home and down-size. But if I do that, I no longer qualify for a new mortgage. Talk about putting huge numbers of people into a total lose-lose catch-22!

Right now, you can still avoid this so-called B-20 rule with your credit union because they aren’t governed by federal regulations. But it appears that most of them will end up matching the rules at some point. All I can suggest starting January is to call a number of credit unions and ask. You don’t need to go in or fill out an application. Just ask if they’re also using the B-20 regulations.

Another Wave Of New Mortgage Rules

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Another round of new mortgage rules was announced by the Finance Minister last week.
Minister Flaherty told the bank a few months ago to tighten lending and now is doing it for them. In his words: I’ve been listening to the market and I don’t like what I hear. In other words, we’re still borrowing too much, and the government is still very concerned about our debt levels.

Canada has 9.6 million home owners who will only be affected if they decide to refinance. But tighter restrictions will impact the 260,000 new buyers each year.

Refinancing is now capped at 80% of the home value, down from 85%. The good news is that it will save borrowers an average of $6,000 mortgage insurance that kicks in over 80%.

The debt ratio of what you can have for a maximum mortgage payment is reduced to a total of 39% of your gross income, down from 44%. I’m all for that. Even if you do the math on 39%, it would be pretty tight for affordability, and remember that it’s based on your gross income – and nobody takes home their gross pay!

The maximum amortization for mortgages is now back down to 25 years total. Over the past four years it was up to 35 years, down to 30 and now back at where it should always have been: A maximum of 25 years.

As you can imagine, the mortgage brokerage industry is incensed. They claim, and with some justification that this will impact home prices and the $66 billion renovation industry. Less refinancing money is less spending – but then it’s still legal to spend cash instead of borrowed money!

As to the impact on home prices? When the government moved from 30 year maximum amortization to 30 years, home sales were impacted by about three percent. Tightening that again, plus the average home price, could take a lot of the 260,000 new buyer each year out of the market.