A few weeks ago Finance Minister, Jim Flaherty, announced new mortgage rules will be implemented in Canada on April 19th. The reaction across the country has ranged from panic (for those investing in rental properties or flipping homes), to indifference. Overall though, I sense a lot of confusion over the announcement as many people just do not understand the changes.

I have been contacted by clients and Real Estate Agents that are confused about the new rules, and the most common question I am getting is from first time home-buyers concerned that they will need a 10 or 20% down payment. This is not the case.

Here is an overview of the changes:

1. Tighter restrictions to Qualify for a Mortgage

All ARM (variable rate mortgages) and Fixed mortgages with terms less than 5 years are to be qualified at the 5 year posted rates.

Currently most banks use the 3 year posted rate to qualify ARM clients. The current spread between a 3 and 5 year posted rate is approximately 50 bps. This will reflect higher debt service ratios many borrowers, making slightly more difficult to be approved IF the borrower has a large debt load and not enough income to cover.

2. Need to keep more Equity in your home if you Refinance your Mortgage

The maximum LTV for refinances changes from 95% to 90%. Many lenders had reduced this criterion independently over the course of the last year or so. It is designed to prevent mortgagors from “turning their houses into ATMs”. Again note that this only applies when you are REFINANCING your mortgage, NOT a new purchase, or a Mortgage Renewal.

3. More money needed as a down payment for Investment Properties

The maximum LTV for non-owner occupied houses is reduced to 80%. The intent here is to reduce the degree speculative buying that would be naturally encouraged with such low interest rates. This will affect investors that were using the CMHC insurance for rental properties to purchase either residential rental units, or purchasing homes for “flipping”, or speculating i.e. Condo buying. Furthermore, the government is only going to allow 50% of the rental income to be used to qualify the debt service ratios, so this will also make it tougher for this type of investor.

In Summary

It is estimated that these changes will only affect a very small percentage of the marketplace, and most experts agree will not have a signifigant impact on the HOT housing market in Canada. The spring market is just around the corner, and with the low inventories of homes for sale, and interest rates at all time lows, the coming months are going to prove to be a very exciting time for Real Estate Agents and Mortgage Brokers.