As of July 9th the government will be enforcing new mortgage rules in an attempt to discourage people from taking on new loans that will be less affordable when interest rates rise.
The biggest change for home buyers is there will no longer be injured mortgages of longer than 25 years offered. (Insured mortgages are provided for those who don’t have a down payment of 20 per cent or greater, currently 30 year injured mortgages are offered.)
This is a move to try and reduce the debt load of Canadians and to encourage us to pay off debt quicker.
Another change is the maximum amount of equity homeowners can take out of their homes when refinancing is being reduced to 80 per cent from 85 per cent.
There will also be a new rule to ensure a loan is not too large of a percentage of a household’s income.
Finally, insured mortgages will be available only for homes with a purchase price lower than $1-million – a measure to ensure taxpayers do not back mortgages for the wealthy.
The new rules apply only to new government-insured mortgages after July 9. Existing mortgages with longer amortizations can be renewed as usual. However, those who wish to increase their loan amount on renewal will have to amortize over 25 years.
Many experts agree that home prices are currently inflated, particularly in Toronto and Vancouver, and are due for a correction. But there is much disagreement about how much of a prod the market actually needed.
Phil Soper, CEO of Royal LePage, believes that the government, which had already tightened the rules three times since 2008, should have let the market correct itself at this point. He was quoted in the Globe and Mail as saying:
I supported the previous moves but I’m disappointed with this particular set of changes. The market is clearly cooling on a national basis, and I’m concerned that what is essentially a Toronto problem is being attacked with a blunt instrument that’s going to hurt the housing market nationwide.
Mr. Soper argued that many experts are too focused on house price growth, while signs of slower sales in the last month suggest that prices will fall on their own.
National house prices were actually down slightly (May to May) and these averages are being inflated by a few hot housing markets – Toronto and Vancouver. House prices in Toronto rose by 8.5 per cent in April from a year earlier, a recent five-unit “fixer upper” semi-detached sold for $227,000 above asking price!
The moves are likely to have the greatest impact on first-time buyers looking for mid-priced homes. Economists say the changes are the equivalent of a 1-per-cent increase in interest rates.
About Chantal Nephin
