What you need to know if you are Investor or a Home Owner looking to refinance this year.

CMHC with a big announcements March 8, 2010 effective April 19^th, 2010.

Anyone wanting a high ratio mortgage (less than 20% down) and selecting a term of less than 5 years, will need to qualify at the Benchmark 5-year qualifying rate.  This rate is set every Monday by the Bank of Canada (which is typically closer to posted rates).  This means less purchasing power for investors and home buyers!!

"Stated Income" for Self-Employed people will now have more restrictions on it too (eg. Store Owners).   For those of you who have been in business for three or more years you will no longer be able to use this as a financing option. CMHC's intent will be to bridge those moving to self-employment with a reasonable declaration of anticipated income.  Secondly, for those who earn commission income, they will no longer be eligible under this program, regardless of time as a commissioned sales person. Maximum loan amounts on a purchase will be lowered to 90% of purchase price, and refinances will be limited to a maximum 85% of home value.

Finally, CMHC has talked about changing the percentage of rental income that can be used to qualify for a mortgage from the current 80% of rent to 50%. 

Key Points

• Your ability to buy property and use rental income from a suite is going to be affected by this proposal.
• Self employed people are going to have a harder time buying property in the long run.
• The intention of these rules is to protect consumers but in the short term this could cause a real estate price bubble to form, reducing investment opportunities.

 You may have already heard the government will also be changing mortgage lending guidelines that will also take effect April 19^th,2010. For those already pre-approved it will not affect them but would affect any new or future business going forward. Many lenders have been using a number of these guidelines already, while some will adopt these new rules right away, and others will wait until the last minute on April 19^th,2010, serving that portion of the market looking to slip under the wire.

Five - Year Fixed Qualification Rates

Borrowers will now have to qualify using a 5-year-fixed rate regardless of what term they choose to use.  For example, if you want a 1-year-variable rate (at say 2.00%), you will need to demonstrate that you can afford payments for a 5-year term at a higher fixed rate, (like 4.09%). The reasoning for this new legislation is to protect consumers by preparing them for higher interest rates in the future.

90% Maximum Refinancing

The current 95% refinancing maximum will be reduced to 90%.  This will lower the amount of debt people are able to carry ensuring that home ownership is more of a way to save.  This will not be of any help to Canadians looking to restructure debt in an effort to pay more towards the principal and less to high interest debt.  For you investors this will also restrain your ability to leverage properties to buy other investments.  On the safe side it will reduce the ability to use your homes as a cash machine and create more of a safety net if home prices decline.

Minimum 20% down for investment property

Unfortunately this rule is not good news for real estate investors.  Investors buying non-owner occupied rental properties will now need a 20% down payment to get an "insured mortgage" compared to the current 5% down payment requirement.  This will have a definite effect on the buying power of investors which will in turn reduce the amount of rental property being purchased.  As the powers of supply and demand work this could cause an increase in rents by stifling the new supply of rental properties coming on to the market in Canada.

Key Points

• Expect an increase in property sales and mortgage refinancing before April 19^th (potentially causing more buyer demand on the market).
• While these safety measures are intended to protect the average Canadian from too much debt and rising interest rates there is a good chance that it will hurt well positioned investors, people looking to consolidate debt.  Plus, in the long run it might affect renters due to higher rents.

    Call me if you have any questions or need more information.  www.GregAndruff.tel