Learn about the new mortgage rules in Canada as a First Time Home Buyer or Investor

clip_image002Five year fix mortgage rates are again sitting at record lows. What you need to know if you an Investor First Time home buyer or a Home Owner looking to Purchase or Refinance this year is that things have changed.

In my recent article Debunking the Bubble the idea of the market taking a drastic turn for the worst was raised.  Whether this will happen or not only time will tell.  In the mean time, if you have a mortgage or are looking to get one, you need to know what you can afford. The government has changed mortgage lending guidelines that took effect April 19th.

What you now need to know:

Five – Year Fixed Qualification Rates

Borrowers will now have to qualify using a 5-year-fixed rate regardless of what term they choose to use. For example, if you want a 1-year-variable rate, you will need to demonstrate that you can afford payments for a 5-year term at a higher fixed rate. The reasoning for this new legislation is to protect consumers by preparing them for higher interest rates in the future.

90% Maximum Refinancing

The old 95% refinancing maximum was reduced to 90%. This will lower the amount of debt people are able to carry ensuring that home ownership is more of a way to save. This will not be of any help to Canadians looking to restructure debt in an effort to pay more towards the principal and less to high interest debt. For you investors this will also restrain your ability to leverage properties to buy other investments. On the safe side it will reduce the ability to use your homes as a cash machine and create more of a safety net if home prices decline.

Minimum 20% down for investment property

Unfortunately this rule is not good news for real estate investors. Investors buying non-owner occupied rental properties will now need a 20% down payment to get an “insured mortgage” compared to the current 5% down payment formerly requirement. This will have a definite effect on the buying power of investors which will in turn potentially reduce the amount of rental property being purchased.  As the powers of supply and demand work this could cause an increase in rents by stifling the new supply of rental properties coming on to the market in Canada.

Observation

  • Interest rates are currently at historic lows which means that you want to consider what your options are in a few years if and when rates go up (because chances are very likely that they will be higher to some degree).  Make sure you talk to a good mortgage expert regarding your options when your mortgage will be due in a few years so that you can sleep at night.
  • While these safety measures are intended to protect the average Canadian from too much debt and rising interest rates there is a good chance that it will hurt well positioned investors and people looking to consolidate debt. Plus, in the long run it might affect renters due to higher rents if rental housing supplies are restricted.

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