As expected Jim Flaherty announced new mortgage rules this morning. They were not the changes to amortization and down payment that everyone feared.

The changes seem to have been well thought out, changing the down payment required on rental properties, the loan to value one can refinance to, and the qualifying rate for adjustable rate mortgages.

I think Flaherty did a great job in assessing the products that needed to be eliminated from the insurer package. I have long believed that if you could not afford to put 20% down on a revenue property, you could not afford to own one. See the changes below.

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From Reuters

NEW RULES

* Borrowers must qualify for a five-year fixed-rate mortgage, even if they opt for a lower variable rate. Banks and insurers typically assess the borrower’s gross debt service ratio — the cost of financing their home relative to their income — and their total debt service, which includes total debt payments relative to income. Currently, they use either the fixed-rate, or the greater of the variable rate and the prevailing three-year fixed rate.

* Lower the maximum amount a homeowner can withdraw when refinancing a mortgage to 90 percent from 95 percent of the value of the property. The government wants to encourage home ownership as a savings tool so is limiting this type of financing, which allows borrowers to lower their equity in their home.

* Increase the required down payment to 20 percent from 5 percent for insured mortgages obtained for purchasing speculative housing investments not occupied by the owner. Borrowers buying a property they intend to live in that also includes rental units will not be subject to the 20 percent rule.

* The rules that did not change, despite some speculation they might, were the maximum 35-year amortization period and minimum down payment of 5 percent for regular home buyers who plan to live on their properties.

MORTGAGE INDUSTRY

* Innovation began in Canada’s mortgage industry in 2006, including longer amortization periods and higher loan-to-value ratios. Although the number of high-risk, or subprime, mortgages remains low relative to the United States, Ottawa intervened for the first time in 2008 to tighten mortgage insurance rules.

* Canadian law requires banks to obtain mortgage insurance on loans where home buyers make down payments of less than 20 per cent, which are considered high risk. The borrower generally pays for the mortgage premium, which is added to the mortgage payments.

* Most mortgage insurance is provided by the state housing agency, Canada Mortgage and Housing Corp, and is backed by the government. The government also backs private mortgage insurers’ obligations to lenders, subject to a deductible. (Reporting by Louise Egan, editing by Peter Galloway)

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From the Globe and Mail – Variable or Fixed? Both options have merit

My colleague from Ontario, and someone whom I truly admire, Peter Majthenyi discussed long term versus short term rates with the Globe Investor. I have done my own research as to whether fixed or floating is the best option right now, and have written a chapter on it that you can preview soon by signing up for the F Your Mortgage privileged information list. It turns out the benefits of fixed vs. floating have little to do with rising rates, and more to do with (more…)

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From the Financial Times – Lessons for the American housing market

Written by a senior lecturer at Harvard Business School and author of Too Big to Save? How to Fix the US Financial System, this article is interesting in the way that it lays out a series of lessons to the American public, while at the same time making a reasonable argument as to why our Canadian housing market has survived. (more…)

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From Bloomberg.com – Canada May Keep Lending Rate at 0.25%, Repeat June Commitment

The good news.

The Bank of Canada will probably keep its benchmark interest rate at a record low tomorrow and repeat a pledge to leave it unchanged through June.

The target rate for overnight loans between commercial banks will remain at 0.25 percent, where it’s been since April, according to (more…)

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The Canadian Association of Accredited Mortgage Professionals released Revisiting the Canadian Mortgage Market – Risk is Small and Contained today.

While the report is a little bit more logical than the “rates are going up, everyone is F**KED” mentality of the media right now, I’m not to sure how it will be received. I think there will be a large majority pointing to the economist who wrote the report as having a vested interest in taking an everything is okay stance. On the other hand, a logical well thought out analysis like this is needed to calm the mortgage holding community. If he is right, and employment rises higher, we probably have little to worry about even if rates do rise. On the other hand, if we have a double dip recession, we could be in for a lot of trouble.

What do you think, is this report a little bit to conservative?

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