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Hello Everyone:
As you may have heard, The Government of Canada has just announced new standards to Government-backed mortgages. Even though these were just announced today, I’ve already been asked twice about possible implications for home-buyers (especially First-Time Buyers). I’m happy to say that, in MY opinion, these rules should NOT have a negative impact on buyers, or the housing market in general.
Two possible changes which had been CONTEMPLATED, but are NOT being implemented, are the increase of the minimum down-payment from 5% up to 10%, and the
shortening of the amortization period to 30 years. I believe that the first of those, (the increase of a down-payment) would have had extreme negative impact on the housing market. The majority of our hot market is being driven by “First Time Buyers”, who, in most cases, have a 5% down payment saved up, in addition to the 1-1/2% to 2% required to pay for Land Titles Transfer Tax, legal fees other such taxes and costs. Thankfully, the Government chose to leave those requirements untouched. Here are the 3 items they DID change (starting April 19th, 2010) and how they might impact home buyers:
1) Buyers must qualify for the 5-year Mortgage Rate
Excellent Move. Well, actually, most reputable financial institutions already had this rule in place in the last year or more. Here is the scenario that the Government is trying to avoid (and incidentally, this is one of the major reasons for the housing ‘melt-down’ in the U.S.). Here is an example:
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Home Buyers want to buy a $300,000 home with 5% down, meaning a mortgage of $285,000.
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A 5-yr mortgage rate is at 5% with a monthly payment of $1657 (Principal plus Interest)
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Buyers income only qualifies him/her for a payment of $1400 per month. Clearly the house is out of their reach, right? well, not so fast…
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The bank has an “Introductory Rate” of 3% over 6 months, after which the mortgage then goes up to full rate of 5%
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The Intro-Rate of 3% means a monthly payment of $1348, well within the (very happy) buyers abilities.
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Buyer moves into his house, and after 6 months, the rates go up and beyond his means
What this first rule change stipulates is that in order to buy this house, the buyer must qualify for the 5-year rate, no matter how low the intro-rate is. I believe this is a good thing, as it protects the buyer in the long run.
2) Amount of Re-Financing on a home is limited to 90% of the home’s value (down from 95%)
Currently, homeowners (with presumably excellent credit) can borrow up to 95% of their home’s value. This will be reduced to 90%. Again, it’s Governments attempt to protect the home-owner from over-extending themselves. While I feel this is also a good thing, I doubt that it will effect a large group of people.
3) “Purely Investment” type home purchases to require a minimum of 20% down
This deals only with non-owner occupied residences. So for example, if you wish to buy a duplex or triplex, then reside in one unit and rent out the rest, you would still be eligible for the 5% down-rule. If you are purchasing a residential property of 1 to 4 units, and use the entire property as a rental property, you will now have to come up with 20% down. This may effect primarily the ‘first-time investor’, who was hoping to get into the rental market with only 5% down, as many seasoned investors will not have much trouble coming up with the added down payment (although they might not LIKE it much). Is this a bad rule? In my personal opinion, setting the requirements for investment properties a little higher is not a bad idea. From my own observations, far too many people try to get into the real-estate investment market without adequate knowledge, training or information…. and NO, watching 3 episodes of “Flip This House” does not qualify as training.
So, in summation, I do not believe that these new rules will do anything to slow down the market, or inhibit first time buyers (which is NOT their intent). If they wanted to slow down First Time Buyers, they should have consulted with our Provincial Government on how to charge Land Titles Transfer Tax, (which in Manitoba costs the average buyer approx. $2,000). But that’s the subject of another blog-post altogether.
Comments, suggestions and feedback always invited…..
Bo Kauffmann of Remax Performance Realty is the recipient of the 2009 Silver Medallion Award from Winnipeg REALTORS®, the Platinum Club Award from Remax, and is one of Winnipeg's top-producing Real Estate Agents. Check out his website at WinnipegHomeFinder, follow him on Twitter or email him at boknowshomes@gmail.com
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