Attention Ottawa-area readers: CBC Ottawa is looking to talk to a regular investor between the ages of 25 and 50, who actively keeps an eye on the stock market and may have lost money during the economic downturn and are changing their investment strategy. If you are interested please contact Sannah Choi at 613-288-6471. You can also reach Sannah via e-mail at Sannah-(dot)-Choi-(at)-cbc-(dot)-ca.
You would have heard by now that the Federal Government has announced three changes to the rules governing government-backed mortgages (current rules in brackets):
- All borrowers must meet the debt service ratios for a five-year fixed rate mortgage even if they opt for a mortgage with a lower interest rate and shorter term. (Borrowers must satisfy the debt service ratios with the interest rate on a three-year fixed even if they opt for a variable-rate mortgage).
- Mortgage refinancing will be limited to 90 percent of the value of the property. (Refinancings are limited to 95 percent of the value of the property).
- Small rental properties of 1 to 4 units will require a minimum down payment of 20 percent. (Rental properties require a down payment of just 5 percent).
The first tweak appears to be a marginal change because the differential between a 3-year rate (that is currently used to determine debt service ratios) and a 5-year fixed-rate mortgage is only about 0.5%.
The second and third tweak are likely to have a significant impact on investors in rental properties. Many investors purchased their first rental property by taking equity out of their primary residence. With ever-increasing home prices, they would then proceed to take equity out of their first rental property and purchase their next property. Rinse and repeat and pretty soon you can own a string of properties supported by massive amounts of leverage. It would be interesting to see if prices for rental properties decrease (and rental yields increase) in the wake of new mortgage rules.
You can also check out Canadian Mortgage Trends’ take on the subject here.