Is The Sky Falling? What Do The New Mortgage Rules Mean?

Not surprisingly we’ve had several members contact us with concerns about this and wondering how viable our Rent to Own investment strategy will be after July 9. You can imagine how surprised they are to hear that this new policy is actually a BENEFIT to them.

**IMPORTANT** If you get pre-approved before July 9 and want to avoid the new rules, you’ll need to:

Have a purchase agreement dated before July 9 and have a full mortgage approval before this date.

For almost two years we’ve been hearing the government consistently warn that the housing market needed to cool down. What’s interesting is how the real estate market has remained very strong, while the stock market and the overall economy have been struggling to show any positive gains.

That has the Canadian government in a Catch-22 scenario. It can’t raise interest rates to slow down the real estate market because that’s going to send the stock market and the rest of the economy into a downturn. So instead of rate changes the government has had to resort to policy changes, and that’s what led to the changes of mortgage rules last Thursday.

What Are The Changes??

Starting on July 9, 2012 borrowers with less than 20% equity will no longer be able to get a prime mortgage with;

• a 30-year amortization, the max. will now be 25 years
• a refinance to 85% LTV (Loan To Value), the max will now be 80%

The biggest change is that effective July 9 amortization will be reduced from 30 years to 25 years for anyone with less than 20% down payment. These announcements typically only apply to CMHC insured mortgages. In other words, if you put down more than 20% you’ll still have access to 30, 35 or even 40 year terms (check with your mortgage broker or give us a call). The banks typically deal with CMHC insured mortgages and will only work within the new rules.

So what do these new rules mean to you?? Let’s take a look at both the positive and negative side to these new rules.

The Negative

1. Equity is the biggest source for retirement for Millions of Canadians. With the new LTV (Loan to Value) changes dropping to 80% this could have an impact this group. We’ll have to wait and see.
2. People will now have higher monthly payments because they’re going to be paying their mortgages off five years sooner than in the past. The change from a 35 amortization to 30 is equivalent to a 1% interest rate hike.

Let’s look at an example below;

PURCHASE PRICE: $275,000
INTEREST RATE: 3.19%
DOWN PAYMENT: 5%
MONTHLY PAYMENT FOR 30YR AMORTIZATION: $1,174
MONTHLY PAYMENT FOR 25YR AMORTIZATION: $1,314
That’s an additional $140 more you will have to pay each month.

The Positive

1. You’ll be paying your mortgage down much quicker meaning paying much less in interest.
2. Families that were ready to start their path into home ownership that just barely qualified may now have to wait or will be looking for rental properties. This in turn means more demand for your rental properties.
3. If those families that just barely qualified can no longer afford a home in Toronto, they’ll start moving out to the outskirts of the cities. What you’ll start seeing is a much higher demand for starter homes.
4. If you are a borrower/investor who is well qualified, you will see the Banks wanting your business even more. These new rule changes will weed out the pool of prime borrowers and you will start to see Bankers and Mortgage Brokers working hard for your business.
5. If you have a high-ratio mortgage with an amortization over 25 years you shouldn’t have an issue renewing with your current lender.
6. In the next few months we believe we will see a higher demand for rent to own tenants with the recent changes. Meaning more qualified rent to own tenants who will be looking for beautiful homes in beautiful neighbourhoods that all of our members can assist them with.

So get ready to start taking some serious action. You don’t want to be looking back 3 years from now saying “I should of!!”
So maybe next year the sky will come crumbling down, but for now it looks sunny and blue!!

Until next time make the Smart Choice.

Gary Hibbert