In an effort to cool Canada’s housing market (read: Toronto and Vancouver), the government announced last night the end of the 30 year mortgage – just a few years since they parted ways with the 35 year mortgage (and the fourth intervention in 4 years).
Also expected to be announced at a news conference today:
- re-financing of current mortgages capped at 80% of the appraised property value (vs 85% currently)
- no insured mortgages for properties worth over $1 million (meaning you need at least 20% down payment)
How will this affect Toronto Buyers and Sellers? Here’s what we think:
- Some Buyers may have to wait longer to buy if they were depending on the 30 year mortgage to comfortably afford their new house or condo…for example, a $300,000 mortgage at a 3% interest rate would have been $1,286 per month at a 30 year amortization; now it’s $1,445. But really, if a Buyer was depending on amortization to afford their new home, it was probably always a good idea to keep saving a bigger downpayment and wait to buy.
- Some investors will have a harder time making the math work on their investment – breaking even (or ideally making a monthly profit) is critical for investors – you can read all about it in our blog: How to Make Money in Real Estate.
- It’s always blown my mind that you could buy a $1 million property with only 5% down. To me, this change is a no brainer. Not sure how many people it will affect – our million dollar Buyers have always had sizeable down payments.
- We’ve always said that you haven’t ‘made’ any money on your house or condo until you sell it – just because your neighbourhood got $100K more than you paid 6 years ago, unless you’re ready to sell, you aren’t $100K richer. The re-financing game has always scared us a bit – and maxing out at 80% of the appraised value makes sense to me. (wasn’t this one of the contributing factors to the US melt-down?)
Realistically, we all know the government wants to put an end to the 10%+ annual price increases that some markets (read: Toronto, Vancouver) have been experiencing. We’ve always said it wasn’t sustainable. And with the world economy where it’s at, raising interest rates isn’t much of an option. I think the new mortgage rules will have the desired effect – bring our real estate markets more in line with the rest of the economy
So…what do you think of the new mortgage changes? We’d love to hear your opinion!
UPDATE: The new changes to the mortgage rules were confirmed at a press conference this morning. Changes take effect July 9, 2012 – and they announced one more change: maximum gross debt service ratio will be fixed at 39 per cent and the maximum total debt service ratio at 44 per cent.