Changes are coming to Canadian Mortgage Rules. What are the changes and how does it affect us in P.E.I.?
First here are the changes.
The Government will adjust the rules for government-backed (eg. CMHC) insured mortgages as follows:
1. Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
2. Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.
3. Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.
How does each affect us here in PEI?
The first thing to remember is that if you have 20% down payment these three changes will not affect you at all when buying. They also will not affect people who have their mortgage in place before April 19,2011. I’ll go through the pros and cons for each one.
1. As a buyer this may affect you but probably not really. The reason is that because of the relatively low cost of housing in P.E.I. most banks in P.E.I. were qualifying their clients this way prior to the changes. This may keep you from buying that property that is at the very edge of your budget but it is always prudent to not over extent yourself. I think the Bank of Canada sees short term or open mortgage rates fluctuating in the near future but for the most part long term rates should stay fairly stable for at least the next decade. As a “seller” these types of changes have a profound effect on your home if it is “overpriced” for the market. Homes that are 3-10% over the market sales price will become un-financeable and therefore unsellable. They will stay on the market longer and end up selling for much less in the end. Either way this does not change if someone can buy or not just how much someone can buy.
2. Of course this is not going to affect buyers or sellers. This is just for people who are currently home owners. It may however provide a reason for these home owners to sell and repurchase another property to get the most out of their equity. This can be good for PEI as it may be reason for retirees to sell their homes in more expensive areas of Canada and buy here. This allows them to pull out their equity which would be the difference between the sale price and their new purchase price and live here very compfortably with cash in the bank. This could be good for the market in general as increases in activity are always good for the market.
3. This change only affects apartment building purchases or housing purchases for the intent to rent to others. These are hard to police as many purchasers may just advise their bank that they intend to live on the property. Although this is not strictly legal it will happen. It may be a strong influence in getting “sellers” to take back second mortgages or help in some way with the financing. Larger buildings are relatively easy to sell now as they produce a stable income with increases in profit over time as rents increase. Many apartment buildings are being bought by corporate clients but these trends are cyclical. Remember the Canadian Real Estate Association is still lobbying Ottawa for changes to the Capital Gains Tax implications when selling one building and buying another. This current mortgage rule change may be a positive step towards a much needed Capital Gains Tax change.
It’s my opinion that these changes are written for more turbulent markets such as Alberta or Ontario. They are designed to stop the bleeding in housing markets where a mini-home or condo value may have changed from $140,000 to $360,000 and back to $260,000 over an eight or ten year cycle. What is commonly known as "boom and bust". The need for these changes is less relevant in a mostly stable real estate market like the one we have in P.E.I. Along with being less relevent they are much less damaging and may turn out to be very positive.
