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Mississauga Condos New Mortgage Rules

Article Submitted by: Mississauga Condos

Monday, 08 March 2010

On Tuesday February 16th, 2010 Canada's Finance Minister Jim Flaherty announced the new, stricter mortgage rules which will guide Canada's real estate market into this Spring market.All the early speculation was that Mr. Flaherty would announce a higher required minimum down payment from 5% to 10%, and lower maximum amortization schedule from 35% to 30%. Both mortgage rules were left untouched, as the minimum down payment remains 5%, and the maximum amortization which has been a favorite tool used by first time home buyers remains at 35%. The two issues the Finance Minister covered in his announcement were:

•All purchasers are required to qualify based on a 5 year interest rate whether variable or fixed.
•All investor's planning to buy a property that they will not live in, must purchase the property with a 20% down payment.

To address the first of two changes, condo purchasers used to be able to qualify for their mortgage based on a 1 year variable rate which tends to be substantially lower than a 5 year fixed rate. An example is with banks current 1year variable rates between 2%-2.25%, and 5 year fixed rates hovering around 3.49%-3.6%, this equates to almost a 1.5% interest rate difference on their payments.In layman's terms, purchasers simply need to qualify for mortgages based on the higher monthly mortgage payments. You will not have to take the 5 year rate, but must qualify based on the 5 year rates.

The second change in Canadian mortgage rules provides that investors looking to either generate rental income, or renovate and flip property, must have at least 20% down payment.This rule will take several speculators out of the investor market that will not be able to handle a market downturn. In a declining real estate market, investors who purchase properties with a 5% down payment in order to renovate or flip are at high risk of loosing their property. If the market declines by 10% and there is only 5% equity in the home, the investor in already in a negative equity position. (ie: -5%) In a down market it also becomes more difficult to sell the renovated property, which means the investor will have to carry the mortgage cost for longer than anticipated, therefore is at risk of loosing their property. In the other scenario where an investor leases the income property out to a tenant, if the tenant stops paying the rent, the landlord must cover the mortgage carrying costs. If the landlord only put 5% down on the mortgage, the carry costs will be substantially higher than if they put 20% down.In turn, this type of investor is at risk to loose their home as well.

The new rules will be effective as of April 19th, and will weed out several of the speculative investors, and people who can not afford to carry a mortgage at the 5 year rate. Hopefully this will balance out the supply/demand situation in the Mississauga condo market, as less people will be actively looking to purchase property.This will create a market where supply of quality housing will continue to increase, as demand declines based on people who do not qualify for mortgages under the new rules. In turn, it will be easier for purchasers to buy property without competing in multiple offers. However, until these new mortgage rules come into effect, it remains to be a great time to sell your condo, as prices remain high, inventory remains low, and Demand continues to be driven by first time buyers.

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