# Will the new Mortgage Rules Affect You?



## Shayne (Apr 3, 2009)

CMHC has announced that any variable rate mortgage or any terms under 5 years will have to qualify at the 5 year posted rate. 

With the current spreads between the posted rates and the discounter broker rate this mean the maximum you will qualify for has now decreased around 20%.

For example, if you qualified for a maximum of $300,000 based on a broker discounted rate of 3.79% you now will only qualify for a maximum of $244,423 
because you have to qualify at 5.39%

I am guessing this will bring house prices down a bit and condos may increase because they will be the only option for people. Your input??


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## iherald (Apr 18, 2009)

Shayne said:


> CMHC has announced that any variable rate mortgage or any terms under 5 years will have to qualify at the 5 year posted rate.
> 
> With the current spreads between the posted rates and the discounter broker rate this mean the maximum you will qualify for has now decreased around 20%.
> 
> ...


It's possible banks will have to lower their posted rate so that they can continue to loan lots of money. It's in their interest to loan you as much you can afford, so they make more interest.


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## Ben (Apr 3, 2009)

The "Benchmark Rate" applies only to terms of less than 5 years. It seems this rule change won't affect a lot of people, as most people sign 5 year fixed mortgages anyway, so they can continue to qualify at the discounted rate. 

Would it be correct to think that this change might steer people away from signing shorter-term mortgages of 1-4 years? You would qualify for a larger mortgage by signing a 5-year term.

This seems like government's "Big Brother" way of ensuring new home buyer's lock themselves in for what could be an interesting 5 years of rate climbs (little pun there). Not necessarily a bad thing.


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## Shayne (Apr 3, 2009)

That is just it, they will have to qualify at the posted rate not the discounted rate. Hence you are losing 20% of your purchasing power.


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## OhGreatGuru (May 24, 2009)

Ben said:


> Would it be correct to think that this change might steer people away from signing shorter-term mortgages of 1-4 years? You would qualify for a larger mortgage by signing a 5-year term.
> 
> This seems like government's "Big Brother" way of ensuring new home buyer's lock themselves in for what could be an interesting 5 years of rate climbs (little pun there). Not necessarily a bad thing.


People can still take out lower mortgages, at lower rates. But the amount they can take out will be based on their "ability to pay" a posted 5-year rate. 

Home buyer's don't have to lock themselves in. But if rates suddenly go up they won't be completely s*c*r*e*w*e*d because they are not quite "mortgaged to the hilt". This may be "Big Brother", but it's also common sense to prevent massive mortgage defaults. The government is trying to avoid the kind of mortgage crisis they have/had in the US. Do you, as a frugal money-manager and taxpayer, want to have to bail out all the financial institutions because they lent too much money to bad risks, as they did in the US?


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## Ben (Apr 3, 2009)

http://www.albertamortgageexperts.com/wp-content/uploads/2010/03/qualifying-interest-rate.pdf

Fixed Rate Mortgages and Variable Rate Mortgages: For loans with a fixed rate term of less than 5 years and for all variable rate mortgages, regardless of the term, the qualifying interest rate is the greater of the benchmark rate, and the contract interest rate. For loans with a fixed rate term of 5 years or more, the qualifying interest rate is the contract interest rate.

The benchmark rate is currently 5.39%, from the Bank of Canada website (V121764).



Shayne said:


> That is just it, they will have to qualify at the posted rate not the discounted rate. Hence you are losing 20% of your purchasing power.


That’s not true across the board, if I’m reading the notice correctly. The purchasing power is diminished only if the mortgagee signs a contract for a term of less than 5 years, in which case, yes, they have to show ability to pay at the benchmark rate of 5.39%.

If the mortgagee signs a loan for a term of 5 years or more, then they qualify at the contract interest rate, which I assume means the discount rate for which they actually signed the contract.



OhGreatGuru said:


> People can still take out lower mortgages, at lower rates. But the amount they can take out will be based on their "ability to pay" a posted 5-year rate.


See above. Perhaps I am misinterpreting the meaning of contract interest rate.



OhGreatGuru said:


> But if rates suddenly go up they won't be completely s*c*r*e*w*e*d because they are not quite "mortgaged to the hilt". This may be "Big Brother", but it's also common sense to prevent massive mortgage defaults. The government is trying to avoid the kind of mortgage crisis they have/had in the US.


We are in agreement. Where I said “Not necessarily a bad thing”, read “A good thing.”

*********
So if I am reading the 5-March notice correctly, the government is making it more difficult for people who sign short terms to qualify for large mortgages, but holding the status quo for those who sign 5-year terms.


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## Shayne (Apr 3, 2009)

Perhaps I read it a little too quickly. Now the way I read it, if you are taking a 5 year term your need to qualify at the fully discounted rate not the posted rate.

Interesting.


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## Cal (Jun 17, 2009)

I have no doubt the banks will find a way around the recent rule changes.

I think that the HST will initially affect the RE market more, July 1st. As well as rising rates (CDA could lead the US in rising rates for the first time, as our jobs data has been strong), and lack of demand could also impact the market.


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## Berubeland (Sep 6, 2009)

The whole idea of these changes is to deflate the bubble a bit. Apparently in Toronto inventory is at an all time low which means higher prices.

Less qualified buyers means lower prices. That's the plan.


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## lonelimey (Mar 11, 2010)

Hey Berubeland, the same inventory issue applies to Mississauga. My agent tells me virtually every property is receiving multiple offers. It's like shooting fish in a barrel for her right now.


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## Ben (Apr 3, 2009)

http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2010/03/the-5-year-funnel.html

I missed CMT's post back on March 8, and just came across it now, but it gets across the point I was trying to make, and puts a catchy moniker on it: "The Five Year Funnel".

Basically, the changes don't do much to reduce purchasing power, but sure get a lot more people into 5-year fixed mortgages.


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