Mortgage manoeuvring

His intentions were honourable enough. When Finance Minister Jim Flaherty announced in February 2010 what many in the real estate and housing industry expected - tougher mortgage regulations - he hoped it would bring long-term stability to the market and continue to encourage home ownership for Canadians.

"Canada's housing market is healthy, stable and supported by our country's solid economic fundamentals," he said at the time.

"However, a key lesson of the global financial crisis is that early policy action can help prevent negative trends from developing."

Here we are, as of April it will be one year since the changes took effect, and many are wondering if the new rules delivered what Flaherty promised.

And now more changes may be coming, as in late 2010 Ottawa fired several shots across the bow for Canadians amassing too much debt in these days of historically low interest rates.

First, a refresher on the new rules for government-backed, Canada Mortgage and Housing Corp.-insured mortgages Flaherty announced in February 2010:

* All borrowers were to 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 would help Canadians prepare for higher interest rates in the future.
* The maximum amount Canadians can withdraw in refinancing their mortgages was lowered to 90 per cent from 95 per cent of the value of their homes. This, to ensure home ownership is a more effective way to save.
* Buyers of non-owner-occupied properties purchased for speculation would be required to have a minimum of a 20 per cent down payment for government-backed mortgage insurance.


"There's no clear evidence of a housing bubble, but we're taking proactive, prudent and cautious steps today to help prevent one," Flaherty said then.

"Our government is acting to help prevent Canadian households from getting overextended, and acting to help prevent some lenders from facilitating it. If some lenders aren't willing to act themselves, we will act.

These measures demonstrate the government is committed to taking action when necessary to support the long-term stability of a sector that is so vital to our economy and the financial well-being of Canadian families." The adjustments to the mortgage insurance guarantee framework took effect on April 19, 2010.

For its part, the Canadian Real Estate Association (CREA) at the time said it was satisfied with the changes - but cautioned Ottawa against taking any further action.

For investors, it was the third change that had the largest potential impact. In the past, they could typically finance one or two properties at up to 100 per cent loan-to-value (LTV), and up to 90 per cent for their third and fourth units, with up to 40-year amortizations.

With the new rules, investor mortgages on properties deemed to be residential in buildings with four units or less can be a maximum 80 per cent LTV. The maximum amortization period, meanwhile - even for primary homebuyers - dropped to 35 years.

The changes to the rules make it harder to qualify for mortgages.

This is particularly true for variable-rate mortgages and Home Equity Lines of Credit, according to Kevin Boughen, a Toronto area mortgage broker and founding member of the Canadian Association of Accredited Mortgage Professionals (CAAMP) and charter member of The Canadian Institute of Mortgage Brokers and Lenders.

The new regulations were brought in supposedly to curb speculation, since, fearing a U.S.-style housing bubble and other dangers, Ottawa wanted to prevent Canada's real estate markets from overheating.

Flaherty and CMHC worried that too many people were buying pre-construction condos, for example, which could lead to unsustainable or inflated market activity.

In reality, the changes have done nothing to cool this market. Investors are still flocking to these properties, and in some cases they are skirting the rules and obtaining the properties fraudulently.

All they have to do is say they are purchasing the unit as their principal residence, which allows them to obtain 95 per cent LTV, and they pay lower CMHC fees than under the old program.

Now approaching a year under the new mortgage landscape - with hints of further changes on the horizon - what can investors learn from the experience, and what can they do to manage existing properties and prepare to expand their portfolio?

To get Loeffler's five key tips, pick up a copy of our March issue, on newsstands now.

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate

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