There’s no reason to panic! Many are asking how the latest changes to mortgage lending will affect the Toronto real estate market!
Our American cousins to the south have gone through an ugly housing bubble that we in Canada certainly don’t want to experience. Like a tough parent, Federal Minister Jim Flaherty announced that there would be new strict guidelines regarding the rules of borrowing. Our consumer debt has been recorded as being at a record percentage of our personal disposable income, worrying “the powers that be”.
Looser mortgage requirements and historically low interest rates have been instrumental in seducing property virgins and those that had been previously priced out of the real estate market, into jumping in with both feet. Add to that the ATM mentality of using the equity from your property to finance luxury items, and you have the makings of a catastrophe repeating itself here.

Since October 2009, the Government of Canada has been tightening mortgage financing regulations for all federally regulated lenders. These changes have been made to ensure that Canadians will be prepared for eventual interest rate increases and not accumulating too much debt.
On January 17th, 2011, Federal Minister Jim Flaherty announced new changes to the rules for borrowing as of March 18th, 2011.

• Consumers can now only borrow 85% of the appraised value of their property from the current 90% when they refinance. This will ensure that homeowners won’t become too overextended by using all of the equity in their home like a piggy bank when refinancing to pay off credit cards, luxury items, holidays and renovations. It’s tempting when your mortgage payments are 2.25% and your credit card interest is 19% to just keep spending. The goal is in creating a lower debt ceiling for the consumer.

• The maximum amortization for all government backed insured mortgages (those with less that 20% down payment) will be reduced to 30 years from the current 35 years. This change will help reduce the total interest paid on the entire life of the mortgage. For example: with the new changes a 300k mortgage at 4% would pay $104.00 more a month, yet would save over $42,000 in interest over the entire time it took to pay off.

• The government also withdrew its insurance backing on non-amortized loans secured by home equity lines of credit (HELOC’S)

The Canadian Association of Accredited Mortgage Professionals reported that in 2010 with approximately 85,000 insured mortgages, only about 2% would not have qualified with the new lending rules. Most consumers are choosing lower amortization periods by choice with the end goal being to have paid off their mortgage by the time of retirement. Mortgage planners have suggested another method is choosing a longer amortization period with increased payments and escalated paydowns to lesson the overall interest.

Fears of massive drops in home prices due to these mortgage changes are overblown. There’s no reason to panic! These changes are in fact to keep the housing market stable and to protect Canadians from massive debt when the rates do eventually go up.
Home values are forecast to continue at a moderate and steady level in many of the country’s key housing markets throughout 2011 with home sales directed more to the first half of the year.
The 2010 housing market was stimulated with the low cost of borrowing, and this trend will continue in the first half of 2011. Many consumers believe that the rates will eventually rise in the latter half of the year, which could prompt more activity in buying in the first half. Last year saw a flurry of activity that was largely due to the fear of rate increases and the misconception by many consumers concerning the introduction of HST and how it affected real estate transactions.

Within the Toronto area, the housing outlook is stable and expected to gradually increase in 2011. The demand for homeownership will be supported with an improving labour market and the continuation of low borrowing costs. Experts predict that Real Estate sales will settle to decent volumes that are reminiscent of the 2003-2006 periods, from the record levels of early 2010. In the second half of 2011, we are expected to see demand for housing driven by an increase in move-up buyers, empty-nesters and retirees. This will attract interest to the above-average prices found within the Toronto area. Recent research showed that 40 per cent of home purchasers aged 65 plus were buying condos. Zoomers aren’t rushing off to the senior’s home yet, but are enjoying the next stage of their active lifestyle living in luxury. Toronto is currently experiencing a bounty of new construction that has just been completed with lots of choice for those looking. Condo sales made up 33% of all sales last year attracting a wide range of demographics.

We’re going to embrace these new lending changes and get control over our debt like awful tasting medicine that we know is good for us. And the bottom line is that real estate is the soundest investment you can make…when the time is right for you.

For more information on the local Toronto Real Estate Market and how it can work for you: click here