Tuesday, February 16, 2010

Changes in mortgage lending shouldn't stifle prudent borrowers

The Minister of Finance announced changes to mortgage lending aimed at helping Canadians with borrowing against their homes. The changes shouldn’t stifle borrowers who have been good with their money. Here’s a commentary on each of the changes slated to come into effect on April 19, 2010.

Mortgage lenders will qualify borrowers on a five-year fixed rate mortgage, even if they want a variable-rate mortgage

In the last three years variable-rate mortgages have increased in popularity because the interest charged on variable-rates has been lower than fixed-rate mortgages. In my practise, nearly 35% of clients choose variable-rate mortgages. Understanding the risks associated with variable-rate mortgages can help people make good financial choices. This changes proposed mean that the majority of Canadians will be shielded against some of the rate increases that will occur in 2010 to the prime rate. By being more conservative and qualify mortgage borrowers on higher interest rates, the likelihood of running into problems with making mortgage payments in the future will be less. A slight adjustment in the qualifying rate shouldn’t discourage borrowers since I find that most borrowers don’t want to be house poor and are conservative in budgeting for their mortgage payments anyway.

Refinances up to 90% instead of 95%

Although the default insurance premium guidelines allow borrowers to refinance to 95% of the value of their home, I’ve had a hard time finding any lenders that would allow this anyway. Certainly in Guelph and Wellington County, homes under $250,000 are holding their value and in some cases appreciating considerably because of the demand in homes for first time home buyers and investors. If home prices are to soften in 2011, the ability to refinance a home to 90% instead of 95% will allow these borrowers to have more equity left in their homes should they decide to sell within three to five years.

20% down payment on rental properties

Guelph is a hot market for real estate investing because of the driving force of student rental properties. The government will be requiring a 20% down payment on rental properties in order to insure them against default. Ensuring that a borrower has a good down payment, means the landlord has more at stake in the property. Many people in the last year have wanted to get into owning rental properties because they believe they can make a quick buck. Buying real estate is a get rich slowly plan. There are creative ways to work around the 20% down payment, which can still make sense. These will be available for people who have good credit and a history of managing their money.