New Mortgage Rules to be Implemented April 19, 2010

Hello everyone.

Jim Flaherty has, amid rabid speculations, just yesterday unveiled his plans to implent new rules on mortgage financing. They are the following:

1. Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.

2. Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.

3. Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

These new rules come into effect onApril 19, 2010. So, basically, if someone is interested in a variable rate mortgage, they will have to qualify for a 5 year fixed rate with that Lender in order to obtain the variable rate. Economists say that this will not hinder families from purchasing a home, it just means that their household income may have to earn 5-8,000 more to qualify in some instances. Statistics have shown that those in a variable rate mortgage tend to save money in the long run, without locking in, due to the lower rate. Still, these should give the consumer added confidence when applying for a variable rate mortgage.

This brings me to my next topic: The future of interest rates. There’s been a whole lot of speculation in the media as far as what interest rates will do in the coming months. Some have suggested that come June, 2010, prime will rise, and rise sharply. However, Mark Carney has said, through his advisor, that it would be reactionary to raise rates any time soon, and even hinted that the answer may be to keep them low even beyond summer 2010.

David Rosenberg, chief strategist for Gluskin Sheff, wrote, in his Jan. 27 article in Report On Business, “For the Bank of Canada to raise rates before the middle part of 2011 would be totally inconsistent with its current forecast.” Regarding the predictions for a “blowout” reading on 4th quarter GDP, he says, “…for anyone who thinks a big number is likely to help lock in a rate hike this summer, I would suggest that is not going to happen. In fact, my view is that the Bank of Canada will not be raising rates until mid-2011 - at the earliest….Until then, homeowners opting for variable rate mortgage financing will likely not have to face the interest rate music.”

I tend to side with Mr. Rosenberg, and I think that what the Finance Minister has done is prevent families from overextending themselves in some circumstances. This may prompt Canadian families to act, with added assurance, when it is in their best interests, when considering a purchase or refinance.

Although many Lenders already practice the rules that are going to be implemented, I believe the market is driven largely by comsumer confidence, fuelled by the media. Having said that, what can positively effect consumer confidence will inevitably have a positive, trickle down effect on the stability of the housing and mortgage market.