I have now had some time to think about and digest more the changes that are coming April 19th to the mortgage rules, the ones that are published, and the ones that aren’t. Everyone is still cloudy on exactly how the changes will be implemented and additionally what effect it will have on the market, especially in Vancouver. Here is my take on things:
Why make changes to the mortgage rules?
To recap the rule changes, the 3 largely reported changes to high ratio mortgages are as follows:
- Stated income business for self borrowers will require a downpayment of 10% down and will only be able to refinance to 85% loan to value.
- Purchasers of rental properties will require a minimum of 20% downpayment
- All borrowers will be qualified using the Bank of Canada’s posted 5 year posted term for all mortgages for variable rate mortgages or adjustable rate mortgages, and for all mortgages with a term shorter than 5 years.
- Rental income is now to be treated differently (less favorably) when determining the suitability of the mortgage approval.
Now, analyzing all of the above…why did they do this now, and for how long will they keep these policies? I think the main one that shows their thought processes are with regards to the qualifying at a 5 year posted rate for variable rate mortgages and mortgages less than 5 years in term. This means if a borrower wants a fixed rate mortgage for 5 years, they will qualify at the discounted rate. Many borrowers have been opting for variable rate mortgages this past year, and doing so after April 19th will result in:
1) Qualifying for a lower mortgage amount (probably much lower than they need to buy a home in a high priced market like Vancouver).
2) Not qualifying for the amount they need for a variable rate mortgage and requiring them to squeeze into a home using a 5 year fixed mortgage rate.
Basically, they want to kill the possibility of high ratio mortgage buyers getting variable rate mortgages or mortgages with a term than 5 years. Put another way; they want to only deal in 5 year fixed mortgagess for at least the next few years.
I believe this is revealing as to what the government forcasts the near future to be like. They want everyone in 5 year fixed rate mortgages because they believe fixed and variable rates will go up significantly and they are concerned about a housing crisis similar to what has happened in the US 2 years ago with people not being able to afford the higher mortgage rates.
I believe that they will make this a fairly short term measure until they gain confidence that the economy is fully recovered and the rates have gone back up to historically normal levels. The greatest impact on these changes will be in the Greater Vancouver Area, where house prices are staggeringly high. In most of the country, housing prices are not as high and incomes are comparable to the Vancouver area. Many homes in Vancouver rely on secondary suite rental income to pay their mortgages. Between the upcoming mortgage rule changes and the HST coming into effect on July 1, it will be an interesting time for the market in Vancouver.
Variable Rate Mortgage Watch
On the news today was more information on the Canadian dollar approaching par with the US dollar. Often markets will anticipate upcoming announcements with regards to interest rate announcements. If the markets are buying Canadian dollars in anticipation of an increase in the prime rate, then it could make sense. However, it is possible that the increase in the value of the dollar could be due to other factors, in which case the value of the dollar could create conditions in which it would be difficult to raise the prime rate without stunting the economic recovery.
In the meantime, lenders are continuing to discount their variable rates to an even greater extent. I now have an adjustable rate mortgage (ARM) priced at prime -.5%. Lenders are also offering shorter term ARM mortgages providing greater flexibility to the borrower.
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