New Mortgage Rules: The Good, The Bad, The Ugly

New-Mortgage-Rules On April 19 our government will lay down three major rule changes to “prevent” a housing-price bubble and keep homeowners from getting “overextended.”

Here is the official announcement from today:  Finance Department release

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.
  • If history is a guide, certain lenders will implement these guidelines early (i.e.  before April 19).

Interestingly, Minister Flaherty took a small jab at lenders in his release today, saying these rule changes are designed to “help prevent some lenders” from “facilitating” irresponsible lending. 

"If some lenders aren't willing to act themselves, we will act,” said Flaherty.  That’s bold talk given that Canadian lenders have exceptionally low default rates, and already conform their mortgages to all existing government guidelines.

  1. Hey Guys – not sure that limiting refinancing to 90% is such a “bad” thing as you say, IF we are to see a market correction as some speculate.
    Scenario: House worth $350,000 today, refinanced to $342K including CMHC. Client now has only $8000 breathing room! If we see a 10% downturn, they now owe $27K more than their house is worth!
    Just my $0.02.

  2. These are all minor changes compared to what was potentially on the table (10% down / 30-yr).
    How 90% Maximum Refinancing is “BAD” is a bit confusing to me… many banks already limit HELOCs to 80% of the value of the home.

  3. Hi Jake, Thanks for the note. Totally agree with the implications of your scenario. We tried to note that in the story as well. 90% limits to refis therefore have both good and bad points depending on your perspective. For taking a bit of risk out of the market, it’s a good thing. But then it becomes a matter of quantifying that risk and comparing it to the restrictions this policy will cause. Cheers, – Rob

  4. The rental increase is, in my opinion, logical as it would require people to put more of their own money towards an investment.
    To put it into perspective, if you have money in a mutual fund, surely you’d like management to put a good chunk of their own money in the fund to share the risk with the other investors.
    The other items don’t make much sense to me for reasons that Rob already discussed. They’re more like band-aid solutions.

  5. Would this apply to non-owner occupied multi-unit buildings such as duplexes and triplexes? Some quotes I read in some articles seem to imply it would only apply to multiple single unit condos

  6. I can’t believe #3. Investors with high net worths like to leverage as much as possible. 20% down payments for rentals are ridiculous. This will make ROIs way too low and I have no doubt this will keep a lot of rental providers out of the market. The people who suffer are people who need to rent because they can’t afford to buy. This will lead to less choice AND higher rents. 20% down is serious overkill and I doubt Flaherty did enough research on the fallout this will cause.

  7. I think your analysis is bang on. That said, it’ll be interesting to see how this impacts real investors (i.e. more than 5 units and no pre-build condos). Most of the folks I know typically put 10-20% down on residential investment housing, and moving to 20% down isn’t that bad.
    I’ll still see high double and some triple digit returns on my investments in Edmonton, but it will slow me down some.

  8. The 80% rule on speculation is very good. This will keep the leverage out of the market on people that can not afford and the sepculators. If you want real estate rentals and a return, then buy a REIT (ie. Boardwalk, Riocan etc.).

  9. I think #3 is a good rule. Allowing investors to borrow 100% for their income properties is like saying housing prices never drop and “investors” do not need to put any skin into the game and can bet recklessly.
    The reason that rent return became low is not because of lack of 100% financing but because of high property prices in the first place.

  10. I don’t follow how you need to put 20% on a rental and why it’s tied to CMHC.
    If you put 20% down you don’t need insurance do you?
    No where does it say you need to put 20% down at all, it just says to qualify for insurance you do. I’m lost on this rule, it really sounds like a non rule to me.

  11. Good for Flaherty, the 80% rule should go some way to limiting the massive of amount of leverage going on in the RE (rental) market.

  12. Am I right that once the mortgages get insured the insured mortgages can be renewed even if the home switches from owner occupied to rental.
    If so an investor could get around these rules by buying a home with 5% down living in it for 6 months then buying another home and renting out the first one and so on and so forth.
    Of course this approach only works if the investor is willing to live in the homes (s)he rents out so it might not work for slumlord types…

  13. @ Chris — you are right on the 20% down, but you forgot about amortization. You can only skip CMHC insurance if you have 20% down (or more) *and* 25-yr amortization or less.

  14. Not true. You can get conventional mortgages with 35 year amortizations. You can even get 40 year amortizations with 20% down.

  15. @ T.O. resident I’m still lost! Why would I get insurance on a rental if I put 20% down? I don’t need it!
    So saying you need 20% down to get insurance is weird. It’s not the same thing at all to say that you can’t qualify for a mortgage on a rental property with less than 20% down or that you need 20% down to buy a rental.
    So do you or do you not need 20% to buy a rental?

  16. Changes in Mortgage Rules is an Attack on Renters
    The Canadian government came out swinging today against renters in an effort to slow down a rise in housing prices caused by owners of rental properties. Up until now well qualified rental property owners could purchase homes to rent to tenants with as little as 5% down payment, which has meant that many relatively ordinary Canadians could participate in the rental marketplace as owners and landlords, ensuring a solid supply of rental housing in a market where home ownership has become increasingly difficult to achieve.
    By deliberately restricting access to mortgage financing by non-owner occupied buyers even further the government has made it significantly more difficult for revenue property owners to finance their properties.
    Of the 12.4 million households in Canada, more than 8.5 million, over two-thirds (68.4%) owned their home, the highest rate since 1971. At the same time, the proportion of Canadian households that rented their home slipped from 33.8% in 2001 to 31.2% in 2006. About 3.9 million households rented their home in 2006. Canada Statistics 2006
    As a whole Canadians are home owners, with nearly 70% of Canadians owning their own homes, according the last Canadian Census report on the subject in 2006. What is hidden in the statistics, however, are the very real limitations on revenue property ownership, which were increased by the Federal Government’s announcement today.
    According to both the Minister of Finance and the Bank of Canada Governor there is no housing bubble in Canada right now, despite record low interest rates. So today’s changes in mortgage rules, which include the restriction on revenue property borrowers, are a preventative measure designed to ensure that a housing market bubble doesn’t occur. If it does it will not be as a result of speculative buying by revenue property owners funded by CMHC insured mortgages – at least that is the logic of the government’s position.
    Not that this will necessarily prevent a housing bubble from happening, as there were recently great fears that a housing bubble was developing in China, where there has never been high ratio mortgages available, either for homeowner occupied buyers nor for investors. So limiting access to high ratio mortgages doesn’t actually prevent an overheated marketplace from getting out of control, it merely slows it down a little.
    In the meantime today’s changes will make it harder for landlords to increase their housing stock, putting significant upward pressure on the existing housing stock, particularly in Vancouver and Victoria in BC. This will make it easier to increase rents. Since rental vacancy rates are already extremely low, any upward pressure on prices will make availability that much more difficult.
    The move to restrict investment mortgages to 80% LTV or lower was window dressing, according to most economists. But it is window dressing that has potentially disastrous consequences for renters, especially and including those on the margins of society, where the cost of housing has increasingly led to homeless in the past few years.

  17. Does anyone know if the 20% minimum applies to CMHC’s second home product? I am building a home to rent to my parents with only 5% down tomorrow but won’t be closing till Dec.

  18. @ Facebook guy:
    Why can’t another (non-CMHC) option provide insurance for investment properties?
    If the Government wants to directly impact rental housing, they have many ways to do so:
    – Build more units with CMHC collections
    – Tax breaks for apartment builders
    – Tax breaks on rental income
    – etc.
    I don’t see how weeding out the most highly-leveraged investment property “owners” is a bad thing: getting more *professionals* into the business (and less hack speculators) would be good for the market… there are far too many “Craiglist Landlords” in Toronto these days.

  19. Has anyone considered a possible income tax benefit to point #3? Rental losses cut into the taxation revenue for the gov’t. Losses created by leveraging high (interest expense) and getting only competitive rents. I’ve seen a lot of bona fide rental losses over the last couple years. I don’t know if this is off the mark but my two cents.

  20. If a house is available for sale and 20% down becomes the requirement for would-be investor (vs. 5% for owner occupied) it is logical that some (many) investors will be unable to participate in the real estate market thereby reducing demand for that housing unit. Generally, one would expect any market to be softer when prospective buyers are removed from the equation. For those cheering this policy change, markets don’t operate in a vacuum. There is cause and effect and often unintended consequences. I suspect the initial consequence is less housing being converted into rental stock and a tightening in vacancy rates, which means rental increases. It is important to note that rental demand is driven by employment opportunities not government fiddling. Over time, I suspect greater potential rental yields will attract other investors to real estate. However, more than likely, the policy change will create a wealth / opportunity transfer from renters and beginner real estate investors to those that have stronger personal balance sheets. Is this the intended consequence? I suspect there is room for softening the 20% down – when CMHC announced the removal of 40 year AM and 100% down a while back, the set the minimum beacon at 620 for borrowers, which was then reduced to 610, and then again to 600 by implementation time and with consultation with the industry. It is important to note that there is no official go ahead on implementing these changes yet and the earliest any changes will come into effect is April 19th. Change is the only constant!

  21. What many people have overlooked with these policy changes is that it really doesn’t change anything!
    Think about it for a moment….if a few less very leveraged investors have rental properties they can’t afford, then surely its a good idea to get these people out of the market. Yes, perhaps it means a few less rental properties available for renters to choose from and maybe a small rise in rental prices. Will this hurt house prices? Unlikely.
    Why not? Because as rents get more expensive then more people will find it more cost effective to Buy than to Own and house prices will in turn rise due to the increased demand.
    So, in a way, instead of slowing speculation in the housing market, these new rules will in fact push house prices up further, but perhaps in more of a sustainable way.

  22. The change to 20% down on rentals is a major error by the Finance Department.
    It removes highly leveraged investors [which I agree is needed], but it also removes moderately leveraged investors, and investors with significant assets or cash flow, who chose to lever. This has got to be an overall negative for housing because the overwhelming majority of rental mortgages are not at risk.
    Removing dangers from the market is wise, as long as it is done with minimum collateral damage. This change is like a carpet bomb. It destroys its target and wipes out innocent civillians in the process. The civillians in this case are renters and everyday Canadians who use rentals for investments.

  23. My TD bank guy doesn’t think so but I am going to call CMHC today to be sure.
    Another question I am going to ask is whether or not the change applies to new applications after April or new closings after April.

  24. Just spoke to a CMHC underwriter and althought she doesn’t have too much detail yet, she thinks that if you apply before the April date which this is supposed to take effect, you may be “grandfathered”.

  25. Just received the CMHC information and there is way more involved that what has been announced. Looks like no more 80% rental offset on subject rental properties – 50% of rent added to income and need a 2 year average of net rental income which can be grossed up for other rental properties. Advice reads that that policies apply to new applications received on or after April 19 but there can be exceptions where the lender has documentation of a legally binding agreement dated before April 19 but the closing date occurs after the effective date.
    Only mention of the second home program is that it is now limited to one unit owner occupied properties, no more properties for family members where you are charging NO rent.

  26. Interested Lender,
    I am building a small single home to rent to my parents with only 5% down.
    I am signing the paperwork tonight and the property won’t be closing till Dec.
    Do you think I will be ok?

  27. Would someone please explain to me why the government is finacing ( ie insuring) properties that are overtly being speculated? I get the home ownership part but why on earth is the government providing insuance to real estate speculators. The reduction from 95% of value to 80% of value is rediculous . IT should be 0% of value

  28. Changes to the insured “specuvestor” mortgages should have never occurred in the first place. The Canadian taxpayer has no business insuring people who can’t see what a true investment is.
    It is impossible to be cash flow positive on a 5-15% down purchase in many parts of Canada, especially in the west. No bank would ever lend to these so-called investors based on negative monthly returns.
    The real attack on renters is the short term flipper mentality that grew out of the bubble run up whereby so-called investors gave up on rental income as the profit and focused on capital gains.
    Anyone who says otherwise is just spinning nonsense. It seems the people using those products and selling them are up in arms with the “ugly” as they call it. For a market that supposedly lacked speculation, the so-called true test of the bubble, it sure speaks volumes when brokers and speculators try to get loud about the change.

  29. househuntvictoria:
    There are places even in the Lower Mainland where a net return on capital over 4% is possible (from rent only). Monthly positive cash flow is virtually guaranteed at current variable rates, and not unrealistic (by assuming a high occupancy ratio) even at 5 year fixed rates. Not all people who buy a condo as an investment are short term speculators who count only on capital gains.
    Furthermore, a hefty premium is charged for insuring a mortgage, and the CMHC is expected to turn a profit. Why should CMHC refuse to facilitate leveraged investment by not offering insurance for rentals? It might require better credit scores and/or higher premiums in these cases, if there is evidence of greater risk, but the suggestion that it should not be in this market at all is a bit odd.
    Anyhow, the rule is made, and we’ll all just have to live with the results …

  30. I think this will result in the housing marketing prices drop, after April 19th because, there will be more supply than demand. i.e. there will be more people (approx. 20%) who will not qualify for the mortgage test of 5 years fix rate thus, less buyers and more housing inventory.
    Any thoughts on this?

  31. >>>> “Would someone please explain to me why the government is finacing ( ie insuring) properties that are overtly being speculated?”
    Jay do you know anything about the topic you are commenting on?
    I don’t think you do because people like you don’t support their wild claims.
    Your argument is that the rental market is “overtly speculated.” OK. Show us your data. Show us that insured rental mortgages have abnormally high arrears. Show us how much of the insured market consists of rental properties. Show us the percentage of rentals with high ratio financing.
    You can’t, because you don’t know.
    Your claim is baseless, just like the justification for these new income property guidelines.
    I underwrite hundreds of rental deals a year. Rental properties are only slightly more risky than owner occupied residences. If you use CMHC’s own premiums as a guide, you can ballpark that defaults are roughly 1.04% for rentals versus 0.44% for owner occupied homes.
    That provides absolutely no basis for destroying the rental financing market like the DOF just did.

  32. So I currently own a small home and want to buy a larger home to live in[maybe rent the basement out]. I was planning on renting out my current little home as the mortgage is small and I can actually afford both without any rental income.Will I need 20% down or not as I will be applying for a mortgage for house I will reside in.Thanks

  33. Who ever wrote this article, it has been very informative thank you.
    However the last paragraph sounds like sour grapes. Lenders (ie chartered banks have never calculated anything unless their safety margin is EXTREMELY WELL SECURED. Even in extreme recession they make record profits. No doubt there has been a very large percentage of people who have been put at risk because of these overly liberal rules.
    I would even venture to say that if the banks even see a possible loss to their bottom line of .00000000000000001% it make them unhappy. Unhappy enough to want new rules and then cowardly and sleazy enought to blame the government.
    When they want to find another way around something they will.
    Even as we have struggled with as small business owners the government rules have never been the problem, it has always been the self righteous greedy Canadian banks, and the likeminded people who think the banks are all ok.

  34. Hi Bea,
    Thanks for the note.
    The Minister’s statement implied that there was a serious problem and banks were unwilling to do anything about it.
    As you read, we don’t buy that.
    Banks are exceptionally well capitalized, low-risk lenders that follow government guidelines already. In addition, they add their own layer of risk mitigation policies on top of this. There was therefore no need for the Minister’s statement. The paragraph you highlight wasn’t meant to be sour. It was merely intended to reflect the facts as we know them.

  35. why do the dates on these blogs show feb 2010? i am so confused.. if i am looking to buy a home, to live in for good.. do i still need to come up with 20% down?

  36. re Reducing amortizations to 30 years from 35 years: if a deal is in the works and closes March 18th, 2011 or later will they still allow the 35 year amortization?

  37. Hi M,
    Generally speaking, if you have a firm approval (not a pre-approval) from a lender prior to March 18, you can close after March 17 with a 35-year amortization.
    In addition, various lenders will still offer 35-year amortizations after March 17 on conventional mortgages (i.e., those with 20%+ equity).

  38. Hi Rob,
    My salary is 45,000 year save up 40,000 for DP, I have a loan of $5000 paying 100 a month, I am looking to find out how much I qualify for but when I use the Banks calculator do I have to put the qualifying a rate of 5.34 and that only qualify me for a 170000+ Mortage?

  39. Hi lopetegui,
    Among other things, it depends on your term, lender and loan-to-value.
    For example, most prime lenders qualify 5-year fixed mortgages at the contract rate, which can be 3.79% or less today.
    If you take a variable or 1- to 4-year term instead, and put down less than 20%, then prime lenders will use the posted rate (5.34% today) to qualify you.
    If the down payment is 20% or more of the property value, then some lenders will use a 3-year fixed rate to qualify their variable and 1- to 4-year fixed terms.

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