The New Mortgage Rules – Investor Effects and No Surprises

You’ve heard it by now, Government of Canada Takes Action to Strengthen Housing Financing. It’s no surprise and will have minimal impact on the market. There’ll be a little rush, then a little hangover, and then back to normal. I am glad to see some action taken to stop the stupid pre-sale condo speculation, but I’m sad to see it come at the expense of experienced investors. I think it will cause rents to rise in the medium term, most likely in areas of explosive growth (i.e. oil patch) where investors are needed to quickly make units for an already stressed rental market.

Does anyone know if the other mortgage insurers are following suit? (e.g. Genworth, AIG)

Canadian Mortgage Trends had a great write up of the announcement.

These new rules apply to government-backed insured mortgages only.

The Good:  5-Year Fixed Qualification Rates

  • The New Rule: Borrowers will need to qualify using a 5-year fixed rate regardless of what term they choose.  If you want a 1.95% variable rate, for example, you will need to show that you can afford payments at a higher fixed rate, like 4.09%.
  • The Government’s Reasoning: “This initiative will help Canadians prepare for higher interest rates in the future.”
  • The Effect: It will now be harder to qualify for a variable-rate mortgage, but not much harder. Most lenders already use three- or five-year mortgage rates to calculate a borrower’s debt service ratios.  For many discount lenders, this means the qualifying rate will go from something like 3.25% to 3.89%—not a huge difference.
  • The Verdict: A sound and necessary change–although many lenders already use similar guidelines.

The Bad:  90% Maximum Refinancing

  • The New Rule: No longer will you be able to refinance your home to 95% of it’s value. 90% will be the new refinance maximum.
  • The Government’s Reasoning: “This will help ensure home ownership is a more effective way to save.”
  • The Effect: Borrowers will be less able to pay off high-interest debt with lower-cost mortgage money.  On the upside, this rule has the positive effect of keeping equity in the home (which is quite helpful when home prices fall). It also discourages homeowners from relying on home equity to bail themselves out when they accumulate debt.
  • The Verdict: Bad…for people who need to restructure debt in an effort to pay more principal and less interest.  On the other hand, a 90% refinance limit is beneficial in that it deters people from racking up debt and using their homes as a proverbial ATM machine.

The Ugly:  80% Maximum Insured Financing On Rentals

  • The New Rule: People buying non-owner occupied rental properties will need to put down 20% to get an insured mortgage, versus 5% previously.
  • The Government’s Reasoning: To reduce speculation.
  • The Effect: The number of investors creating rental housing will drop notably. Investors will need to borrow down payment funds elsewhere (assuming it’s allowed) or use higher-cost non-insured lenders (like TDFS) to get 90% financing. Note: This rule does not apply to multi-unit owner-occupied homes with rental units (like duplexes and triplexes).
  • The Verdict: Ugly.  How the government can go from 100% rental financing (17 months ago) to 80% today is confounding. The intent is understandable, but the government could have increased net worth requirements, increased Beacon minimums, tightened debt servicing guidelines, or limited the number of insured rental mortgages a person can qualify for. Instead, the solution was near-draconian, and it will have an effect on the rental stock in Canada. Will it cause a material rise in rents?  That’s a tough call, but it will definitely reduce the supply of rental units and limit Canadians’ investment options.

What to Expect:

  • Undoubtedly there will be a rush of applications to beat the April 19 deadline.
  • The government says “Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.”
  • The 80% rental rule will crush the income property financing business for some lenders and brokers.

There’s also a good discussion in myREINspace about the mortgage changes here, here and here.

What this will mean for experienced investors is moving a little slower, and slightly reduced ROI’s at this point in time. It’ll also mean a little bit more work to ensure appropriate leverage.

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  • Great article, Chris. Thanks for posting.

  • Hey Chris,

    Solid article. You did a better job than I did detailing the changes. 🙂

    To your question regarding Genworth and AIG, I asked the same questions yesterday when I heard Flaherty’s announcement.

    I am going to do some digging myself to see if I can find the answer.

    Onwards and Upwards,

    • A

      Thanks Neil, it’ll be interesting. It appears that it will be a 50% add-back, which will put a serious cramp in a lot of people’s strategies.

  • Hey Chris, I see all the real estate investor people talking about how this will ruin the rental market. What do you base that on? And why should taxpayer-backed mortgage insurance be used for real estate investors anyway?

    • A

      Hi Mark, first, I’ll mention that CMHC backed mortgages have the lowest delinquency rates of any mortgages, so you might ask your MP how the profit that CMHC is making on my mortgages is helping you. The CMHC programs are the most cost-effective way of supporting rental housing.

      I don’t think it’ll ruin the rental market, but I think it will reduce the available pool of rental units. Less supply, given constant demand, results in higher prices. This is particularly important in places like Fort Mac, where there’s a very low vacancy rate. It’s still an important channel for investors to pick up the units and turn them into rentals. Now, I don’t advocate buying pre-build units, but it is a way that new units become available for rentals.

  • Great sum up with some excellent links, thanks for posting them, Chris! Have you received an answer to your question about Genworth and AIG yet?