New Real Estate Rules
Government of Canada Moves to Protect and Strengthen Canadian Housing Market
The Government of Canada recently announced adjustments to the rules for government guaranteed mortgages aimed at protecting and strengthening the Canadian real estate market.
The new measures include:
1) Fixing the maximum amortization period for new government-backed mortgages to 35 years;
2) Requiring a minimum down payment of 5% for new government-backed mortgages;
3) Establishing a consistent minimum credit score requirement
4) Introducing new loan documentation standards.
This announcement marks a responsible and measured approach by the government to ensure Canada’s real estate market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada.
The new limits are planned to take effect October 15, 2008. This would allow existing mortgage pre-approvals with the common 90-day duration to be used or expire. Certain exceptions would also be permitted after October 15. The government will work closely with all stakeholders to ensure timely and effective implementation of these measures.
The new regulations apply only to new mortgages, while existing originations will be unaffected. The lag period prior to the regulatory change will allow existing mortgage pre-approvals to be used or expire. All mortgage insurance companies will be affected by this regulatory change.
As Canada Mortgage and Housing Corporation (CMHC) is a Crown corporation, the government is ultimately responsible for CMHC’s obligations, including mortgage insurance claims. Hence, CMHC will no longer offer 40-year amortization and 100% loan-to-value ratio mortgage insurance products, given the new regulations.
In addition, the government also backs private insurers’ obligations to lenders in the event of default, provided the business is eligible to the guarantee, but claims are subject to a 10% deductible of the original principal amount of the loan agreement.
Private insurers are still free to insure 40-year amortization and 100% loan-to-value mortgage products, but the lack of government backing will lead to sizeable increase in risk. This may mean the elimination of these products after October 15, or a higher insurance cost for the borrower.
The measures announced today will build on the strength of Canada’s real estate market. According to the International Monetary Fund, the increase in house prices in Canada is based on sound economic factors such as low interest rates, rising incomes and a growing population. A recent Statistics Canada report concluded that home ownership is at record levels, with over two-thirds of Canadians owning their own home.
For the news release from the federal Department of Finance, visit www.fin.gc.ca/news08/08-051e.html.
————————————————————————————————————
Contact the Jeffrey Team for more information - 416-388-1960