Impact of the
NEW MORTGAGE RULES

In February, the federal government introduced changes to mortgage rules in an effort to more effectively balance the strong mortgage and real estate market.

Perhaps the most illogical of the rule changes is the fact that despite the February announcement date, they actually weren't scheduled to come into effect until April 19. If history has taught us anything about revisions to the rules governing financial services, one thing we know is that making rules more restrictive for consumers, while also giving those same consumers lead time to play with the more lenient rules, tends to intensify the very problem the rules were meant to correct.

Furthermore, the fact the new rules take effect April 19 does not mean that the mortgages themselves have to be funded by then. For those buying new homes with closing dates often years away, ironically, you could be closing with old mortgage rules despite closing potentially years after the new rules take effect.

The changes fall into three key areas:
1) changes to rules for mortgage qualification amounts;
2) changes to maximum refinancing loan to value amounts; and
3) changes to down payment requirements for non owner-occupied and/or investment properties.

Mortgage qualification amount rule changes centre around standardizing the amount a borrower can theoretically qualify for, regardless of the type of mortgage type. In the past, mortgage lenders would qualify a borrower based on the rate for the mortgage they selected instead of a standard rate.

Since short-term and variable-rate mortgages are typically at lower rates than longer-term fixed mortgages, what this often meant was that those selecting shorter term or variable mortgages could qualify for larger loan amounts. Now, all mortgage loans are supposed to be qualified at the five-year fixed posted mortgage rate, which will mean borrowers qualify for the same size loan regardless of the type of mortgage selected.

The change in refinancing of existing mortgages is simple. Until April 19, qualified borrowers could refinance their existing mortgages and increase the loan amount up to 95 per cent of the property's appraised value. The maximum loan amount that will be allowed under the revised rules is a refinance to 90 per cent of the appraised value. The intent is to encourage the forced savings mechanism that owning a home has traditionally been.

The third and final revision is that non-owner-occupied investment properties can no longer be purchased with as little as five per cent down. The new requirement is for a minimum of 20 per cent down or 20 per cent equity in the property, thus allowing a mortgage of up to 80 per cent of the appraised value. This change is intended to minimize some of the real estate speculation that played a big role in the problems for our neighbours to the south.

Even though the new rules have been criticized by people both inside and outside the real estate and lending industries, there is no question the changes come with the best of intentions. No new regulations could ever be liked by everyone.

You can't help but value the fact that our government and mortgage lenders are at least trying to proactively preserve the future strength of our financial system.

Calum Ross is a senior vice-president and practicing mortgage agent with The Mortgage Centre. He has appeared on Canada AM, Investment Television, BNN and Citytv. He holds an MBA in finance and is an Accredited Mortgage Professional.