Variable rate mortgages currently at historically low rates are allegedly causing some consumers to pile on too much debt. When interest rates rise and sooner or later they will, some consumers need to be protected from themselves, something which the U.S. government arguably failed at miserably. Increased interest on a variable rate mortgage can be crippling down the road if safeguards are not put in place now. Placing a second or third mortgage on your home or taking a significant mortgage amount with a low variable rate when buying to free up cash to buy a new F150 pickup or boat as our neighbours to the south commonly did is a recipe for disaster.
In summary, the rules news are as follows:
- Borrowers must be able to qualify for a 5-year fixed rate mortgage.
- When refinancing their home, borrowers can only finance up to 90% of the property's value, previously it was 95%.
- Insured mortgages being taken out for speculative real estate purchases which will not be lived in by the owner will now require a 20% down payment up from the previous 5%. If however a buyer is purchasing a multi-unit rental property and intends to occupy one of these units, the 20% rule does not apply.
- Unchanged is the fact that mortgages with a 35 year amortization period are still available and a 5% down payment is possible for those homeowners who plan to live on their properties.
How these new rules will affect the local market remains to be seen. Those purchasing a property for use as their primary residence will not be adversely affected. Those looking to purchase and mortgage a recreational condo, chalet or other area property not to be used as their primary residence will no doubt encounter some increased scrutiny by the banks.
In recent months we have seen an increase in the number of power-of-sale listings throughout this area. Ironically the most notable of these have been at the upper end of the market with two sales in 2009 well over the $1 million mark. Typically, power-of-sale properties are no bargain. By the time the mortgage is in default, the bank(s) is in so deep they need everything cent they can ring out of the place.
All in all these new rules are a positive step in helping to maintain a state of sensibility especially in markets like Toronto where bidding wars and sale prices well above the listed price have again become commonplace. We have seen little of this foolishness in our market with supply and demand serving to keep a rein on buyers overpaying and over-extending themselves.