Canada's Liberal government recently passed some new legislation aimed at correcting the country's rising housing market, and overall, there's no good news for anyone. Several changes have been decided on, affecting homeowners, investors, possible buyers, and lending institutions.
Changes to Canada's Housing Market
These new changes have huge ramifications for first time home buyers with less than 20% percent down. With the new changes, you will have to show lenders you have more income available (hello second job) or qualify for a lower amount. In reality, these new mortgage rules are managing peoples' wants, and borrowing them only what they can afford. First time home buyers will have to accept the fact that they can't buy the house with the swimming pool and may have to settle for a place that doesn't have a walk-in closet.
Another change we'll see effects non-bank lenders. Because of the new mortgage rules, non-bank lenders such as Merix, First National Bank, or any other non-bank lender that uses back-end insurance on their mortgages, will now have to follow high ratio rules. This regulation applies to all mortgages, even those where the borrower has put down more than 20%. What that means is that these non-bank lenders can no longer offer 30-year amortizations, mortgages on homes worth more than $1 million, and mortgages on rental properties. Simply, they can't afford to. First National Bank, Canada's largest non-bank mortgage lender, has since stopped lending money for rental properties and suspended any loans to those who only state, rather than verify their annual incomes. News gets worse for Merix. After November 15, 2016, this non-bank lender is going to be refusing mortgages and refinancing on rental properties. However, there's no indication these new mortgage rules will affect conventional mortgages through a Chartered bank or the Credit Union. It is important to note that RBC and TD have already raised their mortgage rates because of these new rules. It does mean though that there will be less competition for big banks, which is never good for the consumer.
How Do These Mortgage Rules Affect Investors?
These changes will severely impact those investors who are starting or trying to build up their real estate portfolios. Investors can no longer go to non-bank lenders for their mortgage needs. Instead, they'll have to go to the big banks who will have higher rates. With non-bank lenders mostly out of the picture now, banks like Credit Unions and Chartered may impose new restrictions in the future on the mortgages they offer. If you're thinking of purchasing your next real estate investment property, you'll need to save up a lot more and prepare yourself for high rates. Finding a mortgage broker who specializes in investment properties would be a smart idea.
For larger investors wanting to purchase commercial or multi-family real estate, they can breathe a sigh of relief. To date, the government's changes have focused primarily on single family lending. Real estate investments with five units or more aren't affected by these new mortgage rules.
Canada's new mortgage rules have sent potential real estate investors scurrying. These changes have affected basically everyone involved in the housing market—most of them for the worse. The only ones who seem to benefit are the big banks, which will see an increase in customers. As for small-time investors, they should be prepared to spend a lot more money on interest. However, for large investors, it's business as usual.