Attention Ottawa-area readers: CBC Ottawa is looking to talk to a regular investor between the ages of 25 and 50, who actively keeps an eye on the stock market and may have lost money during the economic downturn and are changing their investment strategy. If you are interested please contact Sannah Choi at 613-288-6471. You can also reach Sannah via e-mail at Sannah-(dot)-Choi-(at)-cbc-(dot)-ca.

You would have heard by now that the Federal Government has announced three changes to the rules governing government-backed mortgages (current rules in brackets):

  1. All borrowers must meet the debt service ratios for a five-year fixed rate mortgage even if they opt for a mortgage with a lower interest rate and shorter term. (Borrowers must satisfy the debt service ratios with the interest rate on a three-year fixed even if they opt for a variable-rate mortgage).
  2. Mortgage refinancing will be limited to 90 percent of the value of the property. (Refinancings are limited to 95 percent of the value of the property).
  3. Small rental properties of 1 to 4 units will require a minimum down payment of 20 percent. (Rental properties require a down payment of just 5 percent).

The first tweak appears to be a marginal change because the differential between a 3-year rate (that is currently used to determine debt service ratios) and a 5-year fixed-rate mortgage is only about 0.5%.

The second and third tweak are likely to have a significant impact on investors in rental properties. Many investors purchased their first rental property by taking equity out of their primary residence. With ever-increasing home prices, they would then proceed to take equity out of their first rental property and purchase their next property. Rinse and repeat and pretty soon you can own a string of properties supported by massive amounts of leverage. It would be interesting to see if prices for rental properties decrease (and rental yields increase) in the wake of new mortgage rules.

You can also check out Canadian Mortgage Trends’ take on the subject here.

This article has 13 comments

  1. OK, question for you if you don’t mind. Here are my details:

    – Bought a new place in February 2008
    – Paid $270k + GST
    – Put down 15%
    – 3 year variable (Prime -.55 , fixed payments)
    – Beg Bal was $245k
    – Depending on rates, End Bal should be $213k – $217k

    I lost my job in April 2009, but found a new job almost immediately but had to move to a new city. I put renters in my place and will have to re-finance in February 2011. Will I only be able to finance 80% of my place? Will that be based on a new appraisal or on the original appraisal? If it’s based on a new appraisal that comes back at say $250k, will I have to come up with the additional cash to get my mortgage balance down to 80%?

  2. Pingback: New Mortgage Rules: Good or Bad?

  3. I can’t believe how stupid banks are. Do they really not know that the problem stems from their less than sensible policies of late. Really? Basing everything on the credit score and taking refuge behind CMHC doesn’t sound like lazy to anyone else?

  4. As a former lender I can truly say that we looked at the five c’s of credit – character (integrity), capacity (sufficient cash flow), capital (net worth), collateral (assets to secure debt) and conditions (interest rate and amount of principal).

    For any lending institution to only focus on the credit score while ignoring the other criteria’s of getting credit would be wrong. At the end of the day it comes down to common sense. People need to look beyond “today” and should start focusing on the “what if” scenerios of tomorrow.

    Worse case scenerio, lots of foreclosures and people become very interested in renting and I’m able to go out and add more properties to my portfolio. Capitalism is so great.

  5. You should contact the people at REIN out in Alberta. http://www.reincanada.com I wonder how their members are taking this news regarding cash flowing investment properties.

  6. Is there a typo here:

    All borrowers must meet the debt service ratios for a five-year fixed rate mortgage even if they opt for a mortgage with a lower interest rate and shorter term. (Borrowers must satisfy the debt service ratios with the interest rate on a three-year fixed even if they opt for a variable-rate mortgage).

    First you say “five-year”, then you say “three-year”.

  7. The first tweak appears to be a marginal change because the differential between a 3-year rate (that is currently used to determine debt service ratios) and a 5-year fixed-rate mortgage is only about 0.5%.

    Also, do you know for a fact that all lenders are currently using the 3-year rate to determine how much money to lend?

  8. Dave: “(current rules in brackets)”

  9. Ha, I’ll admit to missing that but the notation is confusing… Better to just prepend all those with “Previously…”

  10. Canadian Capitalist

    @Dave: Sorry. I’ll update the post. I did start off with “Currently” before every old rule but thought it read ugly. And Jon thanks for your comment.

    @Twiddle: I’d think the new rules would apply to refinancings as well but I’m not sure.

    @Gail: News reports suggest that it is the banks that requested Finance to tighten regulations. I don’t know how true it is but apparently they wanted Finance to act because they didn’t want to appear to be the bad guys.

  11. I think the third tweak will definitely have some investors scrambling before these new regulations come into play this spring.

    Based on Flaherty’s commentary, it also seems as though the door has been left open in a sense that more changes could come at a later date.

  12. It’s hard to know who is at fault more… the bank who should guide the “unknowing” retail investor how much debt they can service, or the individual retail investor who out to know themselves how much debt they can service.

  13. @Gail: I agree (hiding behind CMHC), but if I was a bank, I’d do the same thing. Banks have and always will continue to look for profits and not looking out for the general welfare of consumers or clients. Sad but true.

    @Bob: Good point. They (http://www.reincanada.com) must be freaking out.