New Mortgage Rules

There has been a lot of media coverage over the past week or so concerning the new mortgage rules soon to be implemented.

The following article was on the front cover of Thursday’s Globe & Mail…give it a read if you haven’t already.

“Flaherty Clamps Down on Mortgage Rules to Cool Overheating Market”

For a summary of the changes and what was written:  ”at a news conference in Ottawa, Mr. Flaherty confirmed that Ottawa will reduce the maximum amortization period to 25 years from 30 years. Secondly, the maximum amount of equity homeowners can take out of their homes in a refinancing is being reduced to 80 per cent from 85 per cent.

In an effort to ensure taxpayer-backed mortgages are not going to wealthy Canadians, the availability of insured mortgages will be limited to homes with a purchase price of less than $1-million.

And lastly, there will also be a new rule aimed at ensuring the size of a loan is not too big in comparison to household income. The maximum gross debt service ratio will be fixed at 39 per cent and the maximum total debt service ratio at 44 per cent.”

The changes will take effect on July 9, 2012. My feeling that the most important part of these changes for us has to do with CMHC.

CMHC insured mortgages used to be capped at a  25-year amortization.  Then, at some point a few years ago, the CMHC insured capp was increased to 30 years.  Then to 35, and then to 40.

For those of us in the real estate and financial industries the 40 year amortization made a lot of people very nervous. However, what it did do was boost the number of first-time buyers who could now afford a monthly payment on a mortgage for their first condo. I think we all knew this day was coming, ever since the 40-year amortization was done away with, and then the 35.

In the space of a decade, we went from 25, to 30, to 35, to 40, to 35, to 30, to 25 year amortizations.  And during that time, house and condo prices have risen. These new changes are preventative measures to help cool the market, and avoid catastrophe like what we’ve seen in other parts of the world.

Ultimately, this will have the greatest affect on the people who can barely afford to buy their first condo or house and perhaps they are the ones that should be taking some extra time to save up for that downpayment they will now need more of. Remember that old anecdote people used to talk about when the US real estate market collapsed? “You know you’re gonna have a problem when folks on minimum wage are qualifying for $500,000 mortgages!”

Take the case of a first-time condo-buyer who has 10% down on his $300,000 condo.

That $270,000 mortgage, at 3.19%, for a 5-year-fixed rate mortgage with a 30-year-amortization results in a monthly mortgage payment of $1,178.09 including CMHC fees.

The same mortgage with a 25-year-amortization increases the mortgage payment to $1,322.23.

If a buyer can afford $1,178.09 per month, but can’t afford $1,322.23, then this is a pretty strong indication that the buyer is spending beyond their means.

That’s precisely the point of these changes!

Now, Liberty Village is a neighbourhood with a tremendous number of finished and soon-to-be-finished condos that attracts a high percentage of first-time-buyers. Will there be enough of them to sustain the Liberty Village condo market once these changes have come into effect and the speculators and other sellers have listed their new condos for sale? Time will tell but I suspect Liberty Village will undoubtedly feel a slow-down, if for no other reason than a sheer supply increase.

Expect an update on this topic in the coming months.

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