Mortgage Rules Changed Again - It`s Official

[bizaro86]

http://www.montrealgazette.com/business/fp/money/Flaherty+tightens+mortgage+rules/4119505/story.html



The finance minister announced changes to the mortgage rules again. Longest amortization has been reduced to 30 years from 35 years. Also, refinancings on personal residences have been reduced to a maximum of 85% from a previous maximum of 90%. Finally, no more CMHC insurance will be provided for HELOCs.



Any thoughts on how this will change things for investors, or does it even matter at all?



Regards,



Michael

 

[housingrental]

This will have a negative impact on purchasing properties - though maybe not a bad idea to reduce chances of default - especially on those:



With multiple single family properties - as qualifying for the next one will be that much harder

Owner occupiers purchasing near the top of their budget - a small portion at the margins will be buying a cheaper place



All in all - good policy change - but still leaves the question - Why did they ever allow these high of ammortizations in the first place?

 

[JoeRagona]

I'll let the experts comment on the impact it will have economically but as an investor I look forward to this because it just filters out more of the speculators and non-sophisticated investors.



If you have been following a systematic approach to your portfolio by not just using the lowest possible down payment, stress testing properties for this change to come then you should be in a better position than others who have not followed the rules - ie like Adam said it will be harder to qualify.



The other upside is more renters!!

 

[kfort]

I would agree with the above. Stress testing @ 6% interest, 25 year amortization schedule, triple the local vacancy, 10% management fees, and an overall cost increase of 3% per year leads me to not worry as much as some who are investing at their limit. I think it will be an overall positive though a slight one. I expect more changes and rule tightening over the next two or so years as clearly people have not been listening to warnings.... I think the changes will come until either people stop loading on debt or the economy recovers enough that the government doesn't have to harp on the average Canadian for owing $1.50 for every $1 they make.

 

[mortgageman]

I think the issue in Canada is unsecured debt, not mortgage debt.

It's not uncommon to see clients with $25,000, $30,000 and more in credit card debt never mind unsecured lines of credit.

Reducing maximum refinance limits to 85 loan to value just means visa and the banks make more on credit cards and unsecured LOCs.

Many of my clients take 35 year amortizations so they have payment flexibility when there is a life event like a baby (think mat leave), an illness, a lay off, or a return to school, etc. Those with some discipline make larger payments or lump sum payments to effectively reduce the amortization.

Reduced amortizations make it harder for investors to qualify for rental properties so there will be pressure to push rents up to help the subject property and portfolio cash flow.

Reducing the number of first time buyers will also drive up rents.

 

[Peter]

The new rules will only have a marginal impact on homebuyers and even less of an impact on real estate investors. The only rule that will impact first time homebuyers is the change in maximum amortization. This will go from 35 years down to 30. The result is that a first time homebuyer will not be able to afford quite as much as they may have previously. Having said that, the government`s concern was to prevent new homebuyers from getting in over their heads and we only have to go back 5 years and the maximum amortization was only 25 years. So if you look at this over a 5 year period, we still have a higher amortization today. To put this into perspective ` on a $200,000 loan today ` the difference between a 30 am and a 35 yr am is only about $70 a month. So yes, there is an impact, but it will be a small one.


As for the other rule changes, those were clearly designed to prevent Canadians from using their homes as an ATM machine. Canadian household debt is at a record high and Flaherty does not want gov`t backed insurance to assist in financing it. So for that reason, they will no longer insure high ratios HELOCs and will limit the ability of Canadians to refi up to 90% - the max is now 85%.


The unintended consequences will be a run-up of purchases before Spring ` similar to what we saw before the onset of HST last year ` People will rush to `Get in while they still can..` before the new rules take affect and before rates start to rise.


The only real surprise to me is the sense of urgency Flaherty had in doing this now. That tells me to expect higher rates sooner than later.



Peter

 

[flyingsquirrel]

Ya. Reducing from 35 yrs to 30yrs is going to have a big impact on those without a lot of cash for the down payment to achieve the 1.1 DCR. Just like me

Investing in real estate in here is getting harder and harder.

 

[Peter]

Actually - this has zero impact on you as a Real Estate investor.

These rules are for high-ratio CMHC insured mortgages only. The government disallowed high ratio mortgages on investment properties last year.

Having said that - look for Genworth's reaction and how lenders will react on amortizations for conventional mortgages....



Peter

 

[bizaro86]

[quote user=Peter]Having said that - look for Genworth's reaction and how lenders will react on amortizations for conventional mortgages....




Indeed. When the "rules" changed from 40 year amortization to 35 that only applied to CMHC, but good luck getting a 40 year mortgage even if conventional. I assume in this case the same thing will happen, and the de-facto maximum will become 30 years.



Michael

 

[RedlineBrett]

Good post by Peter.



Though many people were screaming when CMHC discontinued 40 year ams... I didn't notice a change in my client flow and if a property wasn't working with a 35yr am it certainly wouldn't with a 40... I think the 'get in while you can' vibe will be quite short lived.

 

[flyingsquirrel]

Does that means the rent is going to go up soon?

 

[Thomas Beyer]

A similar blog and my thoughts are here:



http://myreinspace.com/forums/p/15550/78920.aspx?#78920



Essentially: a step in the right direction .. but not far enough. With only 5% down, an added CMHC premium, 30 year amortization and no including of full condo fees in condo purchase analysis too many folks take on to much debt (too early in their lives) !



Having watched the housing market collapse in the US, UK or Ireland due to too much borrowing by unqualified borrowers Falherty took the right next step in trying to avoid it here in Canada !



I think one more round of tightening is to be expected later this year or next year, namely 7.5% to 10% down for new buyers, perhaps restricting it to the first home only, and a full inclusion of condo fees in underwriting analysis !



I think overall this is very good news for real estate investors as it keeps the real estate market healthy, balanced, growing and rents will increase too due to higher demand !!

 

[gwasser]

[quote user=ThomasBeyer]A similar blog and my thoughts are here:



http://myreinspace.com/forums/p/15550/78920.aspx?#78920



Essentially: a step in the right direction .. but not far enough. With only 5% down, an added CMHC premium, 30 year amortization and no including of full condo fees in condo purchase analysis too many folks take on to much debt (too early in their lives) !







I agree with most issues and answers raised here. But why worry about the condofees? ither way, as a home owner or codo owner you do have to pay for utitilities and building upkeep. It is true though, that you as a condo unit owner do not control when the repairs are done, but that is (to some degeree) what the reserve plan is for.





Impact for real estate investors? Reduced cash flow, offset by fastser payinmg off your mortgage and less total interest expense. Possibly better rents (except in rent control areas).

 

[onzevil]

Thank you ^^

_________________________



Some people say that this is gclub
location The accidents of life. However, many people
struggling to come to see accidents that gclub.

 

[fumbrunner]

Little impact on me. I have always tried to go in with 20% down. I have a HELOC, but at 80% LTV. Most investors will see little impact. I agree with the comments on how Canadians seem to be using the homes as ATMs. LOCs held by Canadian chartered banks have increased from $122B in 2006 to $218B in October 2010. Personal loans and credit cards have seen increases as well, but not nearly to the same extent. People have relied far to much recently on the appreciation of their homes to fund their lifestyles.

 

[countryproperty]

Very interesting comments. The big change for investors was last year and it was not so much the 20% down it was the 50% rental add in versus the 80% rental off set change that was totally uncalled for by Jim Flahrety. He obviously had a bad experience as a child. That rule needs to be changed back!



As a side note with the exception of my first home my next 3 were bought with 5% down or less in one case and in my area (New Brunswick) I was able to do that and still achieve positive cash flow (property analyzer). House prices are relativly low here and the rents are decent.



As far as the recent changes it will affect first time home buyers in the sense that they will have to wait longer to save more so they can afford the house they want on the up side house prices should decline a little.



The truth is consumer debt is a huge problem and Mr. Flahrety does not seem to have the interest in dealing with it. In the last 3 or 4 years Pay Day loan shops have been popping up every where there are almost as many of those as Tim Hortons almost (and that is alot in NB).



Thanks

Mark

 

[countryproperty]

If there is little impact from 35 to 30 why not leave it alone. Yes tighten up the refinace rules but please Mr. Flaherty stop putting up road blocks for the average Canadian trying to buy a home.

 

[Thomas Beyer]

[quote user=countryproperty] ... Mr. Flaherty stop putting up road blocks for the average Canadian trying to buy a home ...


The question is how much subsidies is the average Canadian willing to pay to bail out delinquent mortgage holders, as CMHC is government i.e. tax payer funded.



Also, in most countries far MORE than 5% down is required.



In addition, you can withdraw from your RRSP taxfree as long as you pay it back in 15 years - a FAR BETTER ALTERNATIVE to encourage investment/savings .. and then to use that, if you so chose, to buy a home.



My suggestion: 10% down MINIMUM .. ONCE .. for your first home .. every sub-sequent home 15-20% down !



If you buy a $300,000 home and do not have $30,000: do not by a home .. yet ! Save some more, for example through an RRSP with a 30-40% tax break, scale down the car(s) you drive, how much you smoke, or cut down on latte's and eating out until 10% down is achieved .. then buy a home !



To accumulate $30,000 in an RRSP takes rally less than $20,000 net invested !



Somehow Canadians seem to think it is their God-given right to buy a home as soon as they have a job or graduate from college, at 25 or 29. Somehow that "society owes me" attitude is cause for failure down the road. If you're 95% levered plus a 4.5% CMHC premium, i.e. essentially 100% levered, you are putting yourself and society at risk, you become inflexible to move and you are essentially renting: from the bank !



Equity upside, especially considering realtor fees and CMHC premium, is NOT a given in any 5 year period, and as such it is an illusion that the first time homer buyer "builds equity".



Example: you buy the house for $300,000 with 5% down .. with a 30 year amortization and a $300,000 mortgage you pay about $1450/month plus property taxes, say another $200 plus utilities f another $200 or perhaps condo fees if condo or some upkeep. Say $1850/month .. more than most 3 BRs cost to rent !



In 5 years the property might be worth 15% more .. so $45,000 .. and you paid down the mortgage 5%, say another $15,000 .. so $60,000 in "equity" before sales commission of perhaps $15,000 plus the $13,500 CMHC fee .. so really only a gain of perhaps at best $30,000 in 60 months or $500/month .. more or less like renting !! You lose if prices stay flat or if you have to move in 2-3 years due to mortgage penalties as you

a) could have saved $200-300/month renting, so $12,500 or so in 5 years, plus

b) you could have invested the $15,000 downpayment @ 5% perhaps .. so another $3500 .. for a total of

$16,000 gain and more flexibility !



A 5% down CMHC insured mortgage really is a subsidy to the banking industry and to the condo construction industry .. wrapped in the illusion of helping first-time buyers! It is a hidden tax as the CMHC crown corporation is hugely profitable on average, so good for Flaherty actually.



I advocate: more modest homes, more savings, less leverage and a higher down payment !

 

[countryproperty]

[quote user=ThomasBeyer][quote user=countryproperty] ... Mr. Flaherty stop putting up road blocks for the average Canadian trying to buy a home ...


The question is how much subsidies is the average Canadian willing to pay to bail out delinquent mortgage holders, as CMHC is government i.e. tax payer funded.



My suggestion: 10% down MINIMUM .. ONCE .. for your first home .. every sub-sequent home 15-20% down !



If you buy a $300,000 home and do not have $30,000: do not by a home .. yet ! Save some more, for example through an RRSP with a 30-40% tax break, scale down the car(s) you drive, how much you smoke, or cut down on latte's and eating out until 10% down is achieved .. then buy a home !



It is a hidden tax as the CMHC crown corporation is hugely profitable on average, so good for Flaherty actually.



I advocate: more modest homes, more savings, less leverage and a higher down payment !




I must say I certainly appreciate your perspective and while I can agree with a lot of what you have to say I still believe there is a stability that comes with owning a home and it is a forced savings plan and the larger the down payment the longer it takes to buy a home which often leads to more consumer debt because a lot of canadians are not disciplined enough.



I think what Flaherty is trying to do is legislate the common sense and discipline it takes to buy your first home, which I think is a good thing. I just believe he is doing it the wrong way. I think he needs to tackle consumer debt, find ways for people to own homes sooner and yes if at all possible limit the liability to the tax payer.



If someone doesn't save and doesn't own a home in the end the tax payer will be taking care of them.



Remember because we are a socialist everyone pays for everyone's mistakes or lack of discipline. Financial sector and health sector.



Thanks

Mark

 

[Thomas Beyer]

[quote user=countryproperty] .. he is doing it the wrong way. I think he needs to tackle consumer debt,


by doing what ?



It is hard to regulate private firms that offer you to take money at 20%+ !



One needs to give people room to screw up ! It is a (fairly) free society !



The US, UK and Ireland had huge housing corrections, PRIMARILY DUE TO TOO MUCH EASY DEBT !!



CMHC, c/o of the government makes it still way to easy to get too much money !!