Starting April 19th, borrowers will have to qualify for a five-year fixed-rate mortgage even if they opt to apply for a lower variable rate. You will also only be able to borrow up to 90% of the value of your home, instead of the previous 95%. Finally condominium investors will need 20% down to invest instead of the previous 5%.
So, how does this effect us? Well, hopefully it doesn't. Hopefully you've made the decision to live well within your means.
I think variable rate mortgages are a great thing. The reason I like them is because they're generally lower than the 5 year fixed rate, which means I have more money to put towards the principle. That's right I'm still paying the 5 year fixed rate or more when I don't have to. By buying a house I can afford and paying it off quickly I actually end up owning the larger house sooner. All this I discussed in Home Sweet Home.
As for borrowing 95% of your home, I don't really see that as a problem, as long as you're not digging a deeper hole. Debt doesn't have to be a bad word. It all depends on what the money is to be used for. Consumer debt on the other hand is a very bad word. I'll come back to this in a future post. Overall though 90% is not going to hurt us that much and protects the poor decision makers a little from themselves.
Finally, the only way you're making money investing in real estate with 5% down, is if your speculating and flipping. I'm not an investor yet myself, but common sense tells you this is just a bad idea. I saw the effects of this when the housing market crashed here last and people were left owning condos they couldn't afford. Too much risk for me!
I've been researching owning a rental property which I plan to do in the future. Even with 20% down the profit margin is very small. The real money is made only when the property sells and you have to be able to stick it out long term. With 5% down you're using your own money while you wait for prices to rise. If it doesn't happen for years to come, how long can you afford multiple mortgages?
Overall, I think these changes are for the best. They won't cause a major crash or restrict the market too much, which could be devastating to the economy right now. They still allow people to overspend, which while not very smart, is everyone's prerogative. They do prevent the majority of Canadians from going overboard though and seeing as these mortgages are backed by the government, it helps prevent the rest of us from being stuck with their bill.
So what are your thoughts? Is it enough? Should they have done more? Did they do too much?