If the changes to mortgage financing rules announced by the federal government on Monday this week have you scratching your head, rest assured that you are not alone. You can check out the summary in this Globe and Mail article.
Why? Because they will have very little, if any, desired effect by the government in its attempts to either cool off the country’s hottest real estate markets in Toronto and Vancouver or decreasing Canadians debt levels. In fact, I suspect these changes will only serve to further deteriorate areas of the country like Calgary where the economy is not doing so hot, while at the same time doing very little to slow the meteoric rise of Toronto’s real estate market and by extension all real estate market within commuting distance of Toronto as well.
I applaud the government for finally implementing changes to ensure foreign buyers pay their fair share of taxes when selling their Canadian properties, but one has to wonder why they let this happen for so long to begin with? However, foreign buyer taxes are of little concern to Canadians looking to buy their first home or those looking to buy an investment property in Canada today.
I should also note that the impact to real estate investors is unclear and not fully known at this time, but I am monitoring the situation closely with my mortgage broker network and will report as soon as I get some clarity on this from them directly. However, you should know that the new rules are coming into affect starting October 17 this year.
What I can tell you that the rule changes applicable to insured mortgages, that is those mortgages that are insured by government insurer CMHC and other private insurers like Genworth, initially should have little relevance to real estate investors who need to put down at least 20% to purchase investment properties. Hence, no need for compulsory insurance coverage.
You should note however that some lenders may opt to get these mortgages insured as well at their own cost, rather than the investors. How these mortgages will be impacted, if at all, has also yet to be seen.
With that said, this is what I believe are the main items that could impact real estate investors (as opposed to home buyers):
1) It remains to be seen whether the changes announced could lead to Canada’s big banks to eliminate 30 year mortgage amortizations currently available for rental investment properties. This could have a negative impact on our ability as investors to source properties that are cash flow positive at 20% down; something that is already proving difficult across the entire Golden Horseshoe.
However, if you are looking to buy a house for yourself, the changes announced do not appear to impact the currently available 25 year maximum amortization period available to you.
2) It is also unclear whether any of the changes announced will have an impact on either qualifying and being approved for mortgages specifically geared towards real estate investors or mortgage rates on rental and other investment properties.
Now despite what you may be hearing in the news, the changes announced on Monday will also have little impact on most first time home buyers since only those who are at the margins; that is, mainly those who are on the border line of being approved or denied conventional financing will be impacted. Since, those on the margins are in the minority not the majority the impact to first time home buyers will be minimal.
Although the government is propagating that these moves will lower costs to taxpayers should mortgage defaults begin to rise, that is not exactly true. Increased risk premiums will rise as a result of these changes. Which means that mortgage rates will rise as financial institutions pass the buck and risk, like they always seem to do, to borrowers. After all, why should they carry the additional burden or risk breaking record profits for themselves at the expense of their customers and clients?
Perhaps the government has simply forgotten that first time home buyers who will inevitably bear these additional costs are taxpayers as well.
These changes are nothing more than publicity stunts in an attempt to show Canadians that government is doing something to try to ward off alarmingly rising consumer debt levels.
This quite frankly is laughable, especially since government spending and debt levels are rising rampantly themselves, with the Ontario government alone (and hence all Ontario tax payers) currently on the hook for over $302,000,000,000 in debt!
This alarming government debt poses a much larger risk tax payers, in my humble opinion, than Canadian mortgage defaults. After all, if our government defaults on it’s debt, who will be there to bail them out?
Yet the government is doing absolutely nothing to address this 800 lb gorilla in the room, that very few in the media are talking about. Indeed, both the Ontario and provincial governments are actually increasing their spending! Now that’s what I call pure hypocrisy!
Regardless, these changes will have very little government “desired affects”, just like all their other changes they have made to mortgage qualification rules over the past 8 years, in the Globe and Mail article “Four major changes to Canada’s housing rules”. The article does a nice job summarizing these as follows:
“Five previous federal housing moves since 2008
Perhaps, financial institutions have also forgotten that it is their clients that pay the bills.
But what do they care? With less competition in the market as a result of these changes, the big 5 banks have effectively increased their oligopoly over the mortgage financing racket. Which means their customers can expect to get screwed with higher financing costs while they continue to generate record setting profits.
Thank you once again to the feds and financial institutions. I can only imagine where we would be without your sage wisdom and asinine policies, such as these, that screw the poor, fixed income earners and now the middle class as well.
Bravo!
Until next time…
Felix
Your Chief Millionaire Maker & Real Estate CFO
