Flaherty tightens mortgage rules
Finance Minister Jim Flaherty tightening mortgage rules to crack down on speculators and discourage homeowners from taking on too much debt.
TORONTO (CP) — First-time home buyer Hibo Ali has been looking for her dream condo in downtown Toronto for three years, but after losing bidding wars for over-priced properties, she says she’s realistic about what she can afford and welcomes new mortgage requirements that could weed out less level-headed competitors.
Ali, a 31-year-old account manager in digital media, said she began looking in December 2007, but became discouraged by the quality of the tiny one-bedroom condos that were in her price range.
“As any new buyer, what I thought I could afford and what my money could actually get me were two different things.”
Since she returned to the market in 2008, she’s seen the value of some of those units soar by as much as $40,000, and blames stiff competition for driving their values up.
In the past two weeks, she’s bid on three places and lost all of them, coming fifth among 17 people in one case.
Finance Minister Jim Flaherty announced new mortgage qualification rules Tuesday to discourage homeowners from taking out mortgages on homes they might not be able to afford down the road. In order to qualify for an insured mortgage, borrowers will have to meet the standards for a five-year fixed-rate mortgage even if the interest they will actually pay is lower.
The measures are meant to put the brakes on lending to those who are not prepared for an inevitable spike in interest rates, which sit at historic lows. Canada’s current 0.25 per cent policy rate is expected to increase this summer.
For most Canadians, particularly first-time owners who don’t have a lot of cash to put down, the change that will most impact their home-buying choices is the higher affordability test used by banks to determine credit worthiness.
And to discourage speculation, prospective home buyers who want to purchase a property for rental purposes will have to come up with a 20 per cent down payment, instead of the current five.
Generally, banks and mortgage brokers currently use the three-year fixed mortgage rate to test whether a prospective home buyer can afford to meet payments even if the actual interest being charged — such as in a floating-rate mortgage — is significantly less.