The day has finally come. As I wrote about on January 5th in my post New Mortgage Rules the Federal Government has gone ahead and changed several key mortgage laws in Canada. There were rumors several weeks ago that Finance Minister Jim Flaherty was considering passing what was called the 10/30 law.  This proposed law would increase the minimum down payment on CHMC insured mortgages from 5% to 10% and decrease the maximum amortization from 35 to 30 years.

These rumours died away in the past month but today the Department of Finance announced, “The Honourable Jim Flaherty, Minister of Finance, today announced a number of measured steps to support the long-term stability of Canada’s housing market and continue to encourage home ownership for Canadians.”

The changes will come into effect April 19, 2010 and are applicable to Government CMHC insured mortgages.

New Rule: 5 Year Fixed Qualifying Rate

• Requires that all borrowers meet the standards for a five year fixed rate mortgage even if they chose a mortgage with a lower interest rate and shorter term.

This rule is intended to help Canadians prepare for increasing interest rates in the near future. This is especially poignant for variable rate mortgages. If you want a 2.00% variable rate mortgage right now you will have to qualify for the mortgage based on the lenders 5 year rate. Your debt service ratios have to be able to carry a 5 year interest rate even if you are only applying for a lower rate and shorter term.

It should be noted that most lenders already do something fairly similar. For example, if you want a variable rate mortgage many lenders qualify you based on their 3 year rate. Right now the difference between a 3 year rate and a 5 year rate are on average about .60% so the difference shouldn’t be crippling in most situations.

I tend to agree with this provision but as mentioned, it is something lenders have already been doing for some time.

New Rule: Decrease Maximum Refinance Amount to 90%

• The maximum amount a Canadian can refinance their mortgage to has been changed from 95% to 90%.

The Governments official line on this change is, ” This will help ensure home ownership is a more effective way to save.”

I personally am on the fence with this change. Granted, this will help protect homeowners should property values drop by giving an added 5% equity buffer. However it decreases homeowners ability to refinance high-interest debts into low interest mortgage payments, but I suppose it in the same breath will (see: should) act as a deterrent to rack up high interest debt.

New Rule: 80% Maximum Financing on Rental Properties.

• Require a minimum of 20% down payment for Government-backed mortgage  insurance on non-owner-occupied properties as opposed to only 5% under the old rules.

This change is by far the most profound of all three, and extremely harsh.  In 2007 you could obtain 100% financing and less than two years later its been decreased all the way to a maximum of 80%. This will undoubtedly change the rental market in Canada.

It will be interesting to see what trickle down effects are created by this change. Will rent rates  increase as a result?

On the business side there are lenders and brokers out there who rely on rental properties for sustenance. This may very well obliterate their books.

Do you think the Canadian Government is on the right track here? I am interested to know your thoughts.