New mortgage rules April 19th

The Federal Government has just announced their anticipated changes to insured mortgage rules to prevent a Canadian housing bubble (which they see no evidence of yet).

The key changes are:

– borrowers must qualify for the 5 year rate even if they opt for a shorter term.

– on refinancing, the maximum amount of equity withdrawal is reduced from 95% to 90%.

– non owner occupied residences bought for speculation now require a 20% down payment.

More info in this Reuters article. There’s still time to buy (or sell) under the old rules, but you better hurry!

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asp
Member
asp

"non owner occupied residences bought for speculation"

What are the real rules here? do they have some magic formula to decide if a given purchase is for speculation?

Or is that just a editorial comment, and the rule will apply to all non owner occupied properties, regardless of the motivation for the purchase? Perhaps we will have to wait 'til April to see.

Dave
Member

These are good and prudent changes.

blueskies
Guest
blueskies

we all knew this was coming…. no big surprise here

joycer
Guest
joycer

So in addition to "beat the HST", we can expect to hear:

"There’s still time to buy under the old rules, but you better hurry!".

How about this one, "There's still time to screw yourself if you believe everything you read"

blueskies
Guest
blueskies

What are the real rules here? do they have some magic formula to decide if a given purchase is for speculation?

if you already own a home and leverage the equity to buy another you are a speculator……

mino3
Guest
mino3

This is a band-aid on a 3rd degree burn.

patriotz
Member

@asp:

do they have some magic formula to decide if a given purchase is for speculation?

I do. If the rental income does not cover monthly ownership costs, you are a speculator.

Thus all buyers of investment RE in Vancouver today are speculators.

joycer
Guest
joycer

Here's an interesting exercise:
http://www.cmhc-schl.gc.ca/en/co/buho/buho_007.cf

Put in 5800/month gross (70K annual ~ average). 35 year ammortization, 2% variable rate, monthly taxes of $300, and heat at $200.

Maximum mortgage = 410K

Now change interest rate to 4% fixed 5-year and the maximum becomes: 307K

However you change the monthly income, the difference is the same percentage, 25%. For example, at 10,000/month you can get a maximum (variable rate) of 816K vs. 612K on fixed 5 year.

Dave
Member

@blueskies:

I don't agree. Lots of people with long term prudent outlooks leverage the equity in their primary home for second home investments. That doesn't make them speculators.

observer
Guest
observer

Here are some other definitions:

You are a bank sponsored speculator if buy and sell a property within 5 years, which not your principal residence and for which you took out a mortgage to purchase.

You are a CMHC sponsored speculator if you are a speculator and your mortgage is insured by CMHC.

What is necessary to return the market to health is to reduced the number of sponsored speculators because they carry systemic risk to our economy.

Carioca Canuck
Guest
Carioca Canuck

These "changes" are nothing more than window dressing.

gvrdpropertyowner
Guest
gvrdpropertyowner

If CMHC was abolished there would be no need for any of this. All we need to do is let the banks assume the risk for the loans that they approve— including mortgages.

domus
Guest
domus
So, I have now heard and gone through these measures. I believe they amount to a smokescreen, but there is NO substantial change from the status quo. In particular: – using a 5-year fixed mortgage to qualify borrowers will result in 'inflated' income and some creative 'accounting'; brokers will get around that rule in no time. The only sensible thing to reduce borrowing would be to INCREASE the downpayment: there would be no getting around that, no mortgage broker could help you cheat. The government has chosen not to do that. They WILL pay for it in due time; – introduction of a mainimum 20% downpayment for CMHC-insured mortgages on second residences for 'speculative' purposes: what is speculative? If my wife buys a house in her name in order to flip it in 12 months, is that speculation? If I… Read more »
patriotz
Member

@gvrdpropertyowner:

All we need to do is let the banks assume the risk for the loans that they approve— including mortgages.

Um, the problem is that the taxpayers are assuming the risk for the banks. As in CDIC. That is, we are guaranteeing the banks' borrowing, whether or not we are guaranteeing their lending.

The government has every right to regulate bank lending because the taxpayers are the ultimate bagholders.

Non-bank, non-insured lenders can and do make mortgage loans on any terms they like. It's their money and they can do what they want with it. Funny thing though, they are getting out of the business. Why is that you think?

Drachen
Member

@joycer:

"How about this one, “There’s still time to screw yourself if you believe everything you read” "

Nah, too much effort for most people, they'd rather just drop the soap in a prison filled with Real Estate agents and have them do the screwing, for a commission of course!

Drachen
Member

These may be harsh enough measures to keep the market afloat until April, Real Estate agents will be working their asses off to sell before then and some people will want to buy before the new rules. If there is a surge in activity though it will mean an even steeper drop after April as the last of the future demand (at these prices) is used up.

mathematics
Guest
mathematics

It's just mathematics, demand has been weakened. The measure of qualifying for 5 year term will affect the Vancouver market, possibly in a material way considering reports of how many people are barely qualifying. There was an article in the Straight over the last year were the couple said the only reason they could get in was the variable rate mortgage, if rates doubled (to something like 4%), they said something like, "we're dead".

observer
Guest
observer

@domus: Sounds like you are predicting a true subprime situation here, whereby lenders start to lend to subprime borrowers under the new regulations. Worst in fact because in the US, at least they were acknowledged as subprime, rather than under the black market subprime. I guess it all boils down to how well the government can enforce these rules.

Fixed rates are still well below historical norms so there is still plenty of risk in the system even after these changes. And I still laugh every time I hear the the CMHC is insuring mortgages for investment properties without any safeguard that these loans are actually for long term rental stock rather than short term speculation.

White Payer
Guest
White Payer

I just got pre-approved yesterday. According to the "experts", I can buy a $700,000 house with 10% down on a 30 year term with my $93,000/year salary. Isn't that just about what the Van income/price multiple is?

hackmare
Guest
hackmare

@Dave:

If you buy ANY property that is not your primary residence or a recreational property, then you are an investor. The word investor is a pretty synonym for speculator.

Loud Speaker
Guest
Loud Speaker

@blueskies: Thanks for providing price cap on the real estate and making it stronger than ever before,Most of the Olympics visitors talk less about games and show more of their desire to have a place to live in downtown and Vancouver.New mortgage rules will bring death to already DEAD BEARS CASE.Thanks for your hard work through last decade.

Question:What is the benefit of seeing future in advance.

Answer:So we can change it accordingly to reduce risks and damages.

Message:Enjoy the games and buy downtown/Vancouver condo without fear because nomore downturn in decades to come in the Olympics City 2010 best planet place.

rp
Member
rp
The rule that you have to qualify for the 5 year rate is good. It would be shockingly irresponsible of anyone to buy on the basis of current variable rates. But 5 year fixed rates are under 4%, which isn't much of a buffer for a 25-35 year term. The 20% down rule seems like it could be a wash, depending on who is or is not considered a speculator. If rental income covers the mortgage it seems like you're not a speculator. But I don't understand why the government would lend money to this type of business and not another. I think the CMHC should be for owner-occupied properties only. So I guess we'll see. I don't think these rules will have much of a practical effect Canada-wide, but that could be the goal. We'll find out soon if… Read more »
vreaa
Member

@patriotz: "Thus all buyers of investment RE in Vancouver today are speculators."

I agree.

Another way of putting this is to ask how many people would be buying at these price levels if they KNEW that prices would be flat to down. Answer: Almost none. Therefore, there is future price increase speculation in almost EVERY purchase.

A related topic is how demand will respond to dropping prices. The bulls think folks will step in and buy.

Many of us think that dropping prices will bring in cash-out/run-for-the-exits supply and FALLING demand as the speculative component of the price becomes worthless in a falling price environment.

The critical point will be when prices drop below the early 2009 trough levels.

VanRant
Member
VanRant

Too little too late. Bubble will burst in coming months.

DaMann
Member
DaMann

So essentially with the new CMHC rules the did nothing… A whole lot of lip service so when the bubble pops they can say "well we tried" 20% rule for investment properties? They shouldn't even be insuring anything other than someone's primary residence. They have no business insuring investment or recreation properties. Talk about forgetting what your mandate was!!! I was hoping for at least 30 year morts with 10% down. Qualifying for 5 year rates will do nothing, the banks will just fudge the numbers to make things work. They have nothing to lose by feeding people mortgages they can't afford.

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