New Mortgage Rules for Real Estate Investment in Canada—The Changes, Impacts and Benefits

After Jim Flaherty, Canada’s Minister of Finance last announced few changes to Canadian Lending standards on April 19th, 2010, new rule changes are recently introduced to regulate and tighten lending practices once again. Before we go into the nitty-gritty of these new rules , their impacts on real estate investment market and their ultimate benefits to the investors, lets take a quick look at the summery of these three changes which take effect from March 18, 2011.

1. The maximum amortisation period on government-backed insured mortgages will be shrunk from 35 years to 30 years.

2. The maximum refinancing amount that a home-owner is able to borrow against a government-backed insured mortgage will fall from 90% to 85% of the value of the home.

3. The federal government decides to withdraw its insurance backing on lines of credit secured by homes such as home equity lines of credit or HELOCs.

The Impact New Mortgage Rules
This year’s rule changes have no such direct impact on investors rather they will feel the impacts in a more indirect manner. As we must now use conventional mortgages (less than 80% loan-to-value), 35year amortisations will still remain an open option for investors.

Benefits of New Mortgage Rules
Most of the estimated impacts will benefit the investors in many ways.

Systemic Risk gets lowered

• The above mentioned 3 changes are designed to lower the risk of collapse of real estate market or entire financial system. Here the Canadian government attempts to tame the unsophisticated over-leveraged home-owners who knowingly or unknowingly put the entire financial system at risk. These newly introduced changes make the citizens fiscally more responsible by decreasing leverage and aggressive lending tactics. By preventing Canadians from using their homes as ATMs through continual refinancing, these newly implemented rules will certainly spare them the horror of American housing collapse in future. In the volatile financial market this changes brings stability and security for the investors.

Hurdles to Home Ownership

• The higher monthly costs associated with a shorter amortisation periods will certainly hinder consumers to buy homes. No matter whether people afford a home of their own or not, they certainly need a place to live so new barriers to home ownership mean more renters and greater demand for the product rentals for investors.

No change of Interest Rate

• With rising debt levels in Canada, the government is looking to promote fiscal responsibility, but it is anticipated that increasing borrowing costs will stifle economic growth . The introduction of these new rules certainly play in investors favour who can now enjoy low interest rates and maintains some extra cash flow for those with variable rate mortgages.

Author’s Bio: Patricia Briggs is a guest columnist, blogger, author for various websites and communities including Mortgage Fit Community and CCHFA . She has completed her Post Graduation in Social Welfare from California University and is currently working with a reputed Bank located in California. She loves to write articles during her free time especially on topics like bankruptcy, investment opportunities, monetary policies and she also written some articles on the Mortgage Fit site like this.

DIY Tips & Top 10 Features of a Profitable Rental Property

If you’ve ever thought about investing in real estate you’ve probably considered different aspects of a property that can make it an effective investment. It can take a lot of research to find a property that has the types of amenities you’re hoping for, but the hard work and investigation can be a major pay off when it comes to the return on investment. Is there an abundance of jobs and schools in the area? Is there a low crime rate? How high are property taxes? Or perhaps you’ve found a property in a perfect location, but the residence needs some updating in order to get top dollar from rental income or a future sale. Check out these 2 great articles to learn more about the Top 10 Features of a Profitable Rental Property & Do-It-Yourself Projects To Boost Home Value.

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

Quick Facts About the Home Equity Line of Credit

A home equity line of credit, or HELOC, is a flexible line of credit that is secured by the equity in the borrower’s home. It is usually set at the lowest rate available, often at prime or even under prime for those with excellent credit scores. Currently HELOC interest rates are 1 or 2% above prime for most people, as the institutions (often banks) that are financing the HELOC’s need to make a profit in this very low interest rate economic climate.

The line of credit is much like a credit card – it has a maximum, but the borrower does not have to take the entire amount at once. Payments are usually made monthly, and may include principal repayment plus interest or some may require that only interest payments be made.

A HELOC’s value is calculated based on the cost of what it would be to rebuild the home, as well as the market comparables, or sales of similar homes in the vicinity. The current rules right now are that most HELOC’s are limited to 75% of the value of your home. For example, if a home is valued at (or appraised at) $300,000, and you owe $100,000 on your mortgage, you have $200,000 in equity. Because the HELOC is capped at 75% of the value of your home, in this case it would be for $225,000, which is 75% of $300,000. Given that you owe $100,000, that would not be available as a HELOC for you – but the remaining $125,000 would be.

HELOCs have traditionally been used as funds for major expenditures, including college and home repair and remodeling, or as rainy-day funds for times when households are short on cash. Increasingly, however, HELOCS are being used as first mortgages, either to purchase homes, to refinance first mortgages or be used as a source of investment funds – such as the Smith Manoeuvre – this is also known as ‘leveraged’ investing. Note: For those who use credit, including HELOC funds for investment purposes, the interest can be written off as a tax deducton.

One useful feature of these loans is that they may be split into several smaller accounts. For instance, if you wanted a separate account for each use – college, home repair and a car – you could split the equity line into three different accounts.

To qualify for a HELOC, the borrower is usually required to have a Total Debt Service Ratio (TDSR) of under 40%. This means that all of your debt payments (credit cards, car loans, mortgage, the HELOC and any other debt) must not be greater than 40 percent of your total income.

When economic conditions dictate a low, stable prime rate, HELOCs are very safe. However, if interest rates are volatile, the cost of funds for a HELOC can skyrocket quickly. Have you had a HELOC? How have you used your HELOC? Any suggestions?

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.

The Interest Rate Rise

As the Canadian economy recovers from the last year, the Bank of Canada is expected to increase its target lending rate in June. The Bank of Canada has signaled an increase in borrowing costs when it stated in early March that inflation and economic output have been stronger than expected. This news comes from Sophia Drossos, co-head of global foreign-exchange strategy of Morgan Stanley. To read the full article on Bloomberg, please click here.

New Mortgage Rules for Canadians

Finance Minister Jim Flaherty recently revealed the new mortgage standards to take effect April 19, 2010. These new rules are aimed to curb housing speculators (people who buy houses with the intent of ‘flipping’ them for a profit in a short period of time, ie. a few days – 2 years) and ensure that homebuyers are able to manage their debts as interest rates rise.

Here are three new adjustments:

1. Borrowers must be able to afford a five-year, fixed-rate mortgage, even if they opt for a shorter term or lower rate. This rule is to help homebuyers prepare for higher rates in the future.
2. When a home is refinanced, it will be limited to 90% of the value of the home, this is a 5% drop from the previous 95%. This rule has the power to make owning a home a more effective way to save. As CMHC suggests one only borrows up to 80% of the equity, this rule is not a very big set-back for homeowners.
3. When purchasing an investment property, the buyer must have a minimum down payment of 20% to receive a government-backed mortgage, this is a steep hike up from the previous 5%. This big increase will make purchasing rental properties unaffordable to many investors.

These new rules are aimed to make buyers more responsible for they amount they borrow and not purchase outside of their affordability level. Personally, I think these rules make sense. The 20% ‘buffer’ builds security for the lender ie. the bank holding the mortgage, but it also provides peace of mind for the borrower too in the event that housing prices drop and the borrower is forced to sell pre-maturely. As well, by putting down a minimum of 20%, real estate owners are able to avoid the costly CMHC insurance that was tacked on for down-payments below 20%. A $550,000 home carries a CMHC fee of over $17,000 with a 5% down payment. Sure, it is carried over the amortization of the mortgage, but that is just more money out of pocket spread out over several years. (For a discussion on the real cost of traditional mortgages, please see “Alternatives to RRSP’s“).

As well, I am a big fan of keeping one’s housing charges as low as possible, as it is just money out the door each month, regardless of whether one is renting or owning. Keeping one’s total expenses as low as possible (including housing costs) frees up capital for investing in deals that provide positive cashflow, and capital appreciation opportunities, which gets you out of the rat race and into financial independence that much faster.

As always, we welcome your comments! And don’t be shy to contact us for more information about private investment opportunities, as some are not posted publicly on our Events page – feel free to call us at 778-328-7282 or email us at info@sharethewealth.ca

Disclaimer: This blog should be used for informational purposes only and should not replace the advice of a licensed financial professional.