The past 18 months have seen two very opposite financial trends in Canada – the ubiquitous “World Financial Crisis” on the one hand, and the red-hot Canadian real estate market on the other. On April 19 2010, the Federal Government issued new rules for mortgage qualification to “cool” the market down, for fears that we would be setting ourselves up for the same monumental crash experienced south of the border. These changes are as follows:
1. In order to qualify for those ultra-low variable rates offered by some lenders, you must first be able to qualify for the 5-year locked-in rate first. Hence, you cannot simply show that you can afford the payment at the 2.00% variable rate for a 1-2 year term; you now need to show you can afford payments at, say, 5.00% over 5 years, to qualify for the short-term variable rate.
2. The minimum down payment on a house has now risen from 5% to 10% of the value of the property. This is significant – a recent survey showed the average price for a home in Canada is approximately $340,000.00. This means that to purchase an average, single-family dwelling, you need to raise at least $34,000.00. This also has significant effects on the re-financing front, as you will only be able to refinance your property for 90% of its value.
3. The maximum “loan to value” on an income- or revenue-property has decreased dramatically from 100% to 80%. In other words, to purchase that income property, one essentially needs to have a 20% down payment on hand.
While it is difficult to predict the long-term ramifications of these changes, one likely outcome is that people will likely start using their home equity to finance the required down payment on a revenue property. Whether it will lead to a reduction in foreclosures and loan defaults is difficult to determine, but it is likely that the practices of using one’s home as a perpetual ATM machine, as well as unabashed real estate speculation driven by no-money down mortgages, are soon coming to an end.