Changes announced by the Federal Finance Dept. are intended to ensure that the real estate market does not experience a crash because they fear that the public has overextended themselves in terms of their mortgage commitments. It’s nice to know that a Government that has trouble running its own state of affairs knows more than consumers and lenders.
The best that can be said about these changes is at least the Finance Dept. did not ‘screw up’ the real estate and mortgage markets at a time when they are an important contributor in getting us out of the current recession. When so many markets are underperforming, let’s kill the ones that are doing well! This would only make sense to a government official. Thank goodness the changes will have only a minimum impact on our real estate markets.
But enough of the sarcasm, let’s focus on the changes. The most important one is that buyers must now qualify for a mortgage based on the five year fixed rate, regardless of the type of mortgage being borrowed. The fact that a five year fixed rate can be either a posted rate or a discounted rate with most lenders seems to have escaped the bureaucrat’s keen eyes. As well, different lenders also have different five year rates. I am sure the Government will now come up with a ‘prescribed rate’ and we will have to set up a new department just to research, calculate, and announce changes from time to time! Also overlooked was the fact that lenders currently qualify buyers at their own three year fixed rate. Using discounted rates from a single lender, the difference in qualifying rates from three to five years will be just over 1/2%. When you factor in how much extra income a person will need for a $300,000 mortgage, it will probably amount to an extra $4,000 a year in qualifying income.
The second change involves refinancing an existing property. Now an owner can only refinance up to 90% from 95% in the past. This is not a bad change as owners cannot just keep refinancing to the max to take money out of their property.
The third change involves rental properties whereby a buyer must now put down a 20% minimum down payment. It was unfortunate that the press release referred to these types of buyers as ‘speculators’ rather than investors which just demonstrates the thinking of bureaucrats. Again we are not opposed to this change. Anyone buying a condo to rent out knows that you need at least 25-35% down, just to break-even. Many non-resident investors are buying new condos ‘all cash’. This change may impact those buyers in small market areas where 10% down can generate a positive cash flow from rental properties. It will have no impact in the Toronto condo market.
In closing, let’s be grateful that the Finance Dept. did not increase the down payment from 5% to 10% for buyers, on the mistaken belief that more down means buyers will not default when lenders are qualifying on the basis of income! This change would have killed the ‘first time’ buyer market and that in turn would have put the brakes on the ‘move up’ market because these people would have had no buyers for their property! The end result would have a big real estate crash which was what the Government was trying to avoid in the first place!! What more can we say!