Flaherty Tightens Mortgage Lending Criteria in Canada

Jim Flaherty announces changes to Canadian Mortgage regulations.

For several weeks there has been speculation surrounding the tightening of mortgage lending criteria and today those changes were finally announced. Flaherty was careful to reiterate that we are not currently experiencing a housing bubble, however these changes are being put in place to prevent Canada from experiencing the same real estate bust the US experienced.

So What Changes Did Flaherty Announce For Canadian Home Buyers?

1. All borrowers must qualify at the current five year rate. This means even if you are looking to get a 1 or 2 year mortgage with a rate that is lower than the current five year rate, you still need to make enough money to qualify for the mortgage amount at the going 5 year mortgage rate. We have already seen a rule similar to this imposed by the lenders with variable rate mortgages, but this new rule will make it mandatory across all lenders and mortgage types.
2. Maximum loan to value for a refinance is now 90% of the home value which is down from the 95% it has been. This has been put in place to make sure people do not use their homes as a personal ATM, constantly withdrawing available equity. This was a major problem in the US and was one of the reasons so many people now owe more on their property than it is worth.
3. Speculative rental properties are now going to require a 20% down payment. There was not much speculation around what exactly is meant by “speculative”, but you could assume it is a rental property where none of the units will be occupied by the owner. This will be quite a blow to some real estate investors who count on using as much leverage as possible to achieve their necessary returns.

Flaherty did not rule out lowering the maximum amortization from the current 35 years or increasing the minimum down payment required from 5% on residential properties, however has held off making these changes in today’s announcement.

What Do Flaherty’s Changes Mean To The Average Canadian Home Buyer?

In short, not much. In fact the average home buyer is really not affected by today’s announcement. The only people who are going to feel the pinch are real estate investors and people who are stretching themselves a little too thin. Those are exactly the people Flaherty was targeting. The average home buyer will not be affected until such a time as Flaherty reduces amortizations and increases down payment requirements. Really it appears the changes announced today were meant more for show and less for keeping the real estate market in check.

Related articles by Zemanta

• Flaherty moves to toughen mortgage rules (cbc.ca)
• Flaherty tightens mortgage rules (calgaryherald.com)
• Ottawa to toughen mortgage rules (canada.com)
• Buying a home about to get tougher (thestar.com)
• Flaherty to bring in tougher mortgage rules (ctv.ca)

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