Toronto Income Property Newsletter – March 2010
We did it! We won the gold medal in hockey. Wasn’t it awesome!! I’d like to congratulate all of our Canadian athletes who I feel did a superb job. There was a lot of chatter about owning the podium … with 14 gold medals I think we accomplished that goal. Now if only some of that winning spirit could rub off on the Maple Leafs….
On February 16, Finance Minister Jim Flaherty announced new mortgage rules intended to help ensure homebuyers can handle their debt load when interest rates rise, as well as to slow down real estate speculation.
“There’s no clear evidence of a housing bubble, but we’re taking proactive, prudent and cautious steps today to help prevent one. Our government is acting to help prevent Canadian households from getting overextended, and acting to help prevent some lenders from facilitating it,” commented Minister Flaherty.
The new rules take effect April 19, 2010. Here is a quick look at the changes, which apply to government-backed insured mortgages:
1. Borrowers must now qualify based on a five-year fixed rate even if they choose a mortgage with a lower interest rate and shorter term. The government’s rationale for this change is that it will help borrowers prepare for higher rates, although it may squeeze the purchasing power of home buyers. It remains unclear whether borrowers must qualify at the five-year posted rate or the five-year discounted rate.
2. The maximum amount Canadians can withdraw in refinancing their mortgages will be reduced to 90 per cent of the value of their homes, instead of 95 per cent. The government’s rationale for this change is that it will help ensure home ownership is a more effective way to save. The impact of this change is expected to be minimal as relatively few homeowners withdraw equity from their homes to this extent.
3. A minimum down payment of 20 per cent will be needed for government-backed mortgage insurance on non-owner-occupied properties “purchased for speculation,” which realistically means rental properties. While this measure is intended to hamper the speculative buying of properties by reducing the leverage of buyers, it will also impact those buying real estate for general investment purposes.
I have taken a few calls from my investor clients asking how about these rules will affect them. In my opinion, all these moves are positive. The current overwhelming demand for income properties in Toronto needs to subside somewhat. People with only 5% down shouldn’t be buying income properties unless they have other significant assets that improve their mortgage eligibility. There will be ways to get around the 20% minimum but again this will only be for investors that have resources. Be sure to talk to your mortgage professional about how these changes could affect you and for advice on the mortgage strategy that fits your needs.
I have already started to use 20% down instead of 10% down as the expectation for a property to cover itself fully by the rental stream. This will be more reflective of reality and weed out the folks that have been trying to jump in without any cash.
There has been some confusion with respect to the HST that will arrive in July. Here are the main guidelines:
i. HST will come into effect come into effect on July 1st, 2010
ii. HST will not apply on the purchase price of resale homes
iii. HST will apply on services such as moving costs, home inspections, lawyers fees and real estate commissions
iv. HST will apply to the purchase of newly constructed homes. Homes under $400,000 may be eligible for certain rebates from the province
Spring is coming soon. Let’s hope we’ve seen the last snow from winter 2010.