New Mortgage Rules For Canadians Starting April 19th 2010

Jim Flaherty announced changes to mortgage rules in Canada on February 16th, 2010 which are to take effect on April 19th, 2010. Here is a list of the changes:

  1. Borrowers will be tested on their ability to make payments on a five year fixed-rate mortgage, even though they may choose different terms (e.g. a three year variable mortgage). Currently borrowers are tested against a three year fixed rate mortgage. This means people will qualify for lower maximum mortgage amounts. This will protect people from taking out larger mortgages than they can really afford. What some people are doing is opting for variable mortgages (with lower payments) and this exposes them to the risk that gradually increasing interest rates over time (because interest rates can really only go up from here) will make their mortgages unaffordable later on because they bit off more than they could chew up front.
  2. The maximum a mortgage can be refinanced has been lowered from 95% to 90% of the value of the home. This reduces how much a borrower can tap into the equity of their house.  Again this will curb the ability of people to stretch themselves too thin.
  3. Mortgages for homes in which the borrower will not occupy will now require a 20% down payment. It was 5% previously. This reduces speculation in residential real estate since borrowers now have to put up serious money in order to buy.

It should also be noted that these rules apply to those seeking CMHC insured mortgages (or an equivalent private sector mortgage insurer). So if you can find someone willing to offer you an uninsured mortgage you don’t have to worry about these rules.

In the end these seem like very prudent moves by Flaherty. The government doesn’t need to risk dollars insuring risky mortgage behaviour and those who are overextending themselves unwisely. In addition, these measures will hopefully make the Canadian lending industry that much more resistant to what happened in the United States in 2008.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 8 comments
  • Jordan

    Hey Preet what do you think, is Canada in a housing bubble? I know in the Vancouver market housing costs 9x the avg annual income. How can the most expensive housing in the world not be in a bubble?

    Are you worried that the CMHC has more debt then the entire federal deficit? Doesn’t it seem like we’re following the exact same story as the US did a few years ago?

    • Preet

      @Jordan – yes, I do think we are in a housing bubble in areas of the country, notably Vancouver and Toronto. I think the real acid test will be the rising interest rates in the years to come. I’m not too worried about CMHC, as our system is a bit more fool-proof than the US in many respects, but I’m not altogether happy either! :)

  • The Rat

    I think one of the most notable changes that will impact investors is the new minimum down payment of 20%. This is a huge difference and it may entice investors to scramble and seal a few deals before April comes around.

    Nice thread.

  • Bob M

    Dear Mr Banerjee,

    Please could you let readers including myself know of any additional small changes in the Canadian mortgage laws in April 2010?

    Specifically, one question has come up: I was told that there was a specific (lower) down payment required, if one already lives in a house (as a leaseholder for example) and elects to purchase that house.

    Any advice and information on this question or other minor changes affecting personal buyers would be very appreciated.

    Bob

  • 786

    As per Jim in #3 “Mortgages for homes in which the borrower will not occupy will now require a 20% down payment. It was 5% previously.”

    so, i own a house and i am living in there. i also booked a brand new house last August year 2009 for which i will get the possession in march 2011. i m kinda stuck here cuz i already gave away 20G’s for the booking. where does that lead me, do i have to pay 20% as well, i dont want to sell my current house, i want to rent it out…
    or
    It doesnt apply to me because it says “IN WHICH THE BORROWER WILL NOT OCCUPY”….. SO what if i live in the new house and rent out the old one….. really confused… anyone in the same boat

  • Just me...

    I agree that tend to bite off more than they can chew and choosing a variable mortgage can be a bad choice if you’re on a fixed income.

    That’s why I agree with #1 and #2 above.

    I don’t agree with #3 though. I’ve been paying $500+ rent to a landlord for over 15 years and have been working at the same location for over 9 years. I have the ability to pay for a roof over my head and have been paying for many years. I’m not looking for a variable mortgage and would prefer to have fixed that I know I can afford the mortgage payment. I don’t like risk anymore than the lenders.

    I’m not looking for a big mortgage or an expensive house. I’m talking $100,000 to $125,000 here which is peanuts compared to most mortgages.

    Being on a fixed income though means that although I pay for my rent, bills, food, etc for day to day living, I don’t have the ability to save $20,000.

    So I ask, am I really a huge risk to lenders just because I don’t have the ability to save $20,000?

    I agree with risk management, but I feel that sometimes they go too far.

  • Erik Raymond

    #3 I think will cause a lot of problems with new-home-owners, I understand that it might be a ploy to get rid of house flippers and leasers that have swarmed the market the past 20 some odd years. These type of home owners are causing all kinds of problems with the market (not to offend anyone here) but taking a house off the market that was worth $100,000 and flipping it to a grand total $400,000 in a few short months or renting it is all fine and dandy, but then potential new-home-owners get discouraged from buying anything. Now that rule #3 is in play starting next month, you’ll see a lot of people renting and a lot of overprice real-estate not selling. At the end of the day, the loan companies will get their money but they will loose hundreds of thousands of new clients

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