An Insight into How the New Mortgage Rules Affect Canadian Investors
Canadian Finance Minister Jim Flaherty has recently announced new rules for mortgages in Canada. One of the key factors behind this move, many analysts say, is to reduce the amount of personal debt being carried by Canadians. High levels of household debt, which reached 152% of income in the fourth quarter of 2011, are seen as one of the prime dangers to the Canadian economy. Therefore Ottawa is now looking at ways to curb heavy spending, such as applying these latest mortgage rules
One of the more important changes of note for those buying in the more expensive markets, such as in Toronto and Ottawa is the scrapping of government backed mortgages for homes that are valued higher than $1million. TD’s chief economist Craig Alexander believes that changes will affect those buying and selling houses in the country’s most expensive real estate markets, in cities likes Toronto and Vancouver. However, many experts believe these changes to be necessary in order for Canada to avoid a US-style housing crisis and prevent a collapse in the market.
“You can see good co-ordination between monetary policy, fiscal policy and regulatory policy.”
Craig Alexander, Chief Economist at Toronto-Dominion Bank
So what do these new rules mean for the average investor looking to capitalize on the strength in the Canadian market? Here are some of the key changes to the mortgage rules that are due to be implemented on July 9, and what they mean for Canadian investors:
- The government has changed the maximum amortization period from 30 years to 25 years.
It’s important to put this change in context. The shorter term mortgage means that Canadian investors will be able to build equity with their homes at a faster rate giving them the opportunity to refinance to fund additional investments.
While Canadians will be paying more for a shorter-term mortgage, they will also be free of debt faster, providing them with extra financial flexibility in retirement.
- Mortgage refinancing levels will now fall from 85% to 80% of the value of the property.
This change is primarily designed as a way to stop property owners from using their homes as leverage to incur larger debts. It should help to further limit Canadian debt levels. The level of debt has become an increasing problem for the Canadian economy, especially in light of the problems in the Eurozone.
By limiting the level of refinancing available, Ottawa is tightening the purse strings of individual homeowners, with the goal of stabilizing the economy.
- Finance Minister Jim Flaherty has also made a change to the maximum gross-debt-service ratio. Now, investors will now have to allocate at least 39% of their income to housing costs in order to secure a mortgage.
This is likely to make it more difficult for those entering the higher end of the real estate market, as barriers to entry rise significantly. This is another change that is designed to instill stability within the Canadian real estate industry, as it ensures that home buyers are completely prepared for the full cost of their purchase. It will however make it more difficult for low income families to secure a larger property.
The Positive Effect of the Changes
Increased Buying Before the Deadline
The first immediate effect of these recent changes will be a flurry of property buying before the July 9 deadline when the mortgage rule changes come into effect. This means that in the immediate short term, there should be a rise in property purchasing.
Increased Barriers to Ownership leads to Further Rental Investment Opportunities
For investors who have the capital to enter into the market, these changes mean that many more Canadians will be turning to rentals as a short-term solution. An increased demand will provide investors with higher quality tenants and the potential for higher returns on rental prices.
Lower Systemic Risk
While the changes to Canadian mortgages might have unsettled some within the real estate industry, there is an argument that these alterations help to secure the success of Canadian real estate in the long term. The specialists have looked at the options and decided upon these specific solutions to decrease the risk involved in investing in the Canadian real estate market.
Investors must conduct full independent research into the latest changes in order to ensure that their plans for portfolio growth are still viable. Over the long-term, these mortgage changes will likely strengthen the Canadian real estate market, an area which has become the backbone to the progression within the Canadian economy as a whole.
Looking for alternative RRSP eligible investments? Begin today by contacting your local real estate investment specialist.