Sunday, 24 June 2012

Things just got tougher for Property Virgins

Lots of news in the real estate world this week concerning upcoming changes to Canada's mortgage rules and the announcement that one of Canada's major mortgage lenders is shutting down (more on that at the end).

Here is a summary of the new, tighter restrictions on new mortgages as of July 9, 2012:
    • The maximum amortization period will now be 25 years instead of 30 (this only applies to government backed insured mortgages).  If you have more that 20% down this does not apply.
    • The refinancing limit was lowered to 80% instead of 85%
    • Maximum qualifying Gross Debt Ratio (GDSR) is 39%
    • Maximum qualifying Total Debt Ratio (TDSR) 44%
    • You can't get CMHC insurance if your home is over $1 million
In addition, OSFI (Office of the Superintendent of Financial Institutions, Canada's banking regulator, if you will) initially announced that it was going to change Home Equity Lines of Credit (HELOC) from a revolving loan to one that has to be paid back within a certain time frame.  They later relented their position on this but fully intend to go ahead with lowering the limit of the amount you can borrow against your home's equity from it's current 80% to 65%.

I have to admit, for the most part I like the changes.  I've seen too many recent foreclosure situations involving first time buyers who haven bitten off more than they can chew financially with their home purchase.  Just because you can qualify for a $500,000 mortgage doesn't mean you need to buy that high and leave yourself house poor.   What some buyers don't realize is that carrying a house is so much different than renting.  Being able to afford $1,300 (or whatever) in rent does not mean that you can plunk that same amount down on a mortgage and Bob's your Uncle.  They forget utilities,  property taxes, house maintenance, little unexpected emergencies that require financial attention, rising gas/grocery prices, etc.

What I don't like is that it has now gotten even more difficult for first time buyers to get into the housing market.  Like it wasn't tough enough in some markets (Toronto, Vancouver).   Thankfully, the government did not tinker with the minimum down payment.  You can still buy a house for 5% down.  However, first time buyers will need to make more money per month to qualify for the same amount of money.   On the flip side,  going with a 25 year amortization (over the 30 year) will save significant $$$ in interest over that time.   Of course, this only applies to government backed insured mortgages.  If you can afford 20% down or more you can avoid CMHC insurance and you can get whatever amortization term you want that is offered by your lender.

So if you are currently involved in either buying or selling a home what does all this mean to you?

Selling -  You've just lost a pool of potential buyers who can no longer afford your home.   As well, if your home is overpriced and you are "waiting for the market to catch up" to what you are asking, this is the time to shake your head.  Fewer buyers means less demand.  What happens when you have more of a supply than demand?  Prices correct themselves, aka...fall.  Expect that over time house prices will gradually lower.  Jury is out on if this will happen, and if so how fast and by how much.  This is where your major and micro markets come into play.  Some areas may be hit significantly while others not at all.  If you are serious about selling, have a serious look at market stats and price your home accordingly.  The market isn't going to "catch up" to you.  And any REALTOR(R) worth their commission will tell you what you need to hear, not what you want to hear.  And you need to hear this.  If you don't have a REALTOR(R), you may want to consider investing in one.  Selling your home, especially on your own, might just get a bit tougher.

Buyers  with less than 20% down - For the short term, you've just lost a bit of variety in homes available to you.  You may need to lower your expectations and realize that you might not get a palace as your first home. You might have to be willing to take on some homes that have a few "projects" to be done.   You will now be paying more per month for 5 less years.   You will no longer qualify for as much of a mortgage.   If you have a pre-qualification in place you will need to close on your house by July 9, 2012.  If you have not offered on a house yet and can not close before July 9th, 2012, you need to contact your bank to see what your new maximum mortgage will be before you put in an offer and get emotionally invested in a property and then lose it because you no longer qualify for financing.  The seller, the real estate agent and your bank will thank you for making sure this detail is taken care of.   The Good news is that if you do get into a home with payments you can afford under the new rules, you will save a bucket load of interest over the years of your mortgage and your mortgage will be paid off sooner.  Also, if you can afford to wait a little while before you buy, you will save more money for a down payment and might be able to avoid CMHC.  The jury is out on the final say on prices but many are expecting that home prices will start to go down a bit, giving you more variety in homes available in your price range. Sellers may be more willing to negotiate.

Here is what the difference that lower amortization will mean to you in terms of monthly payment:

The basic rule of thumb is you will pay $50.00 per month per $100,000.00 of mortgage, but you will be paid off 5 years sooner.

Amount Old Monthly Payment New Monthly Payment Difference Per Month
$300,000 $1426 $1578 $152
$350,000 $1664 $1841 $177
$400,000 $1902 $2104 $202
$450,000 $2139 $2367 $228
$500,000 $2377 $2630 $253
$550,000 $2615 $2893 $278

I know this entry has probably been a bit dry and long winded but I wanted to wrap up by saying that CIBC has announced this past week that it will wind up it's operations under the FirstLine banner.  For years FirstLine has been a popular choice with home buyers because it offered lower rates and greater flexibility to it's customers than most traditional banks.  CIBC has decided to concentrate more on it's in house mortgage department to increase their profits.  While CIBC operating as FirstLine did a greater volume of mortgages through mortgage brokers, CIBC needed to pay the mortgage brokers a commission which lowered their profits.  By taking away the FirstLine option, they hope that more buyers will get their mortgages in house at a CIBC branch which will help them make an extra few hundred million in profit than they already do.  FirstLine will no longer accept mortgage applications after July 31, 2012.

While I understand that business is business, anything that takes away flexibility, financial options and choice from the consumer is not a good thing.

Lastly, I'm not a mortgage guru.  I love houses...mortgages, not so much, although I acknowledge they go hand in hand.   Therefore, I urge you to call your preferred mortgage professional (either through a big bank or a mortgage broker) and find out what your options really are.   If you need help finding a mortgage professional, let me know.  I've worked with a couple that I would recommend over and over.


  1. As someone who doesn't have their own home yet, this saddens me that it is getting harder and harder to get a mortgage. In my situation for us to move in a bigger apartment (3 bedrooms), we need to pay a mortgage size rent ($1400), but with out any benefits of a house. I'm sure home owners have big debt too.

  2. The Governement seems to want to make everyone's life a little harder. I can remember many moons ago when we bought this house, I worked at the bank at that time. They thought it would be nice if we had 35% down, and we had the old fashion collateral mortgage. I think it was for 15 years, and seemed like forever at the time. Being older and wiser I would do things differently now and not cave to whatever the bank told me.

  3. I appreciate you posting this information. We are working hard to fix up our Manitoba home to sell, so we can relocate to Nova Scotia. I am trying to gather any information I can to help make the transition.


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