Today, Canada ‘s Finance Minister Jim Flaherty announced new housing rules. These rules will make it more difficult for people to qualify to buy new homes. These rules break down into three types:
First Time Home Buyers: The government plans to mandate that all borrowers meet standards for a five-year fixed-rate mortgage, even if they opt for a loan with a lower rate and for a shorter term. This will help prepare buyers for higher rates ahead. Roughly speaking, home buyers can end up paying approx. $250 more in monthly mortgage payments on a $200,000 home, if the interest rates went up by mere two percentage points.
Existing Home Buyers: The maximum amount that can be withdrawn in refinancing a mortgage has been cut down to 90% from 95%.
Real Estate Investors: A minimum down payment of 20% will be required for government-backed mortgage insurance on properties bought for speculation. This rule is aimed at discouraging would-be real estate speculators; ones with less than 20% down payment, to own multiple properties beyond their primary residence.
“Canada’s housing market is healthy, stable and supported by our country’s solid economic fundamentals,” Flaherty said. “However, a key lesson of the global financial crisis is that early policy action can help prevent negative trends from developing.”We want to discourage the tendency some people have to use a home as an ATM, or buy three or four condos on speculation,” Flaherty said.
I personally welcome the government’s move and feel good that these rules came in the nick of time. The recent low interest rates encouraged many buyers to take out big mortgages/buy homes they couldn’t afford if rates were more. If this was not done, we could have risked some sort of a housing bubble, similar to the housing crisis in the United States. In July 2008, Canadian government had made a similar move and abolished zero down payment rules.
Going forward, one expects fewer buyers qualifying for home loans. Fewer buyers will help ease multiple offer scenarios, and with better supply of homes (new listings), home prices might stabilize. Real estate investors will also find more number of renters in the market place.