Earlier this year on July 9th, Finance Minister, Jim Flaherty announced new changes to the mortgage rules. The new measures included shortened amortization periods (30 to 25 years), lowering the maximum amount Canadians could borrow against their home when refinancing (85 to 80 percent), fixing the maximum gross debt service ratio (39 percent) and limiting government backed insured mortgages on homes over $1 million. The main objectives for these changes were to stabilize the housing market and reduce the increasing homeowner debt throughout Canada. After the announcement, many homeowners and property investors were left wondering how these changes were going to affect their investments. Below is an examination of how the new mortgage rules truly affect Canadian real estate investors.
New Mortgage Rules will only affect CMHC Insured Mortgages
First of all it is interesting to note that the majority of Canadians will actually not be affected by these mortgage changes. This is because the new mortgage rules only apply to CMHC insured mortgages and non-bank lenders who use CMHC rules on conventional mortgages. The truth is that the majority of Canadian real estate investors are not taking out CMHC insured mortgages, in fact, only a mere 11% of all Canadian mortgages were insured by CMHC in 2011! There are still a number of 30+ year amortizations (not backed by CMHC) that are available for Canadians.
New Mortgage Rules will benefit the Rental Market
Although there is much concern and speculation surrounding the new mortgage rules, the new changes are actually great news for the rental market. With less people being able to afford a property, more people will be looking to rent, leading to an increase demand for rental property and an upward pressure on rental rates to increase.
Vacancy rates will also go down and real estate investors will enjoy an increase demand of renters. With more people renting, investors can get a steady supply of income from their investment properties. Rental duration is also set to increase, as an increasing amount of renters will be forced to rent longer while they save for a bigger down payment.
New Mortgage Rules will reduce homeowner debt
Lowering the maximum amount Canadians can borrow when refinancing is often left out of the conversation when it comes to the new mortgage rules. Capping financing at 80%, down from 85%, will mostly affect first-time homebuyers and buyers looking to upgrade their current homes. These individuals may no longer be able to afford the more expensive properties, and instead, will have to choose properties that are more within their price range. This will restrict and hopefully reduce the growing homeowner debt problem in Canada.
New Mortgage Rules will increase Canadian Home Prices
The new mortgage rules will have an impact on overall Canadian home prices, especially on its affordability. It is important to note that homebuyers and investors don’t judge what they can afford based on the price of the house, but rather on the monthly payments. With a shortened amortization period of 5 years, monthly payments will increase by roughly 1%. This puts pressure on housing prices to come down in order to balance out the rise in monthly payments. The 5- year change on the amortization period will require (roughly) a 10% decrease in market prices. Below is an example of this:
Say the price of a home is $400,000. Monthly payments on a 30-year amortization will be $1,910. With a 25-year amortization however, monthly expenses will jump to $2,110, an 11% increase in monthly payments. A couple that could afford a mortgage of $1,910 might not be able to afford the new monthly payments of $2,110. Therefore, in order for the monthly payments to stay at $1,910, the price of the house needs to come down by 10%, to $360,000.