Mortgage Rule Changes Impact On Private Lending
“How Will The July 2012 Mortgage Rule Changes Impact Private Mortgage Lending?”
The federal government has announced that mortgage rules which govern banks and institutional lenders in Canada are going to further tighten up this July, 2012.
The main impacts are to mortgage insurance qualifications and amortization periods.
But there is also an impact now to any type of mortgage refinancing action which will be limited to 80% of the value of the property, and to high value properties over a $1,000,000 in value where the max. loan to value is now going to be 80% and not insurable.
The stated goals of these rule changes are to reduce the growth in household debt levels and to cool off some of the overheated housing markets in the country, most notably in Toronto.
While the long term impact of the proposed legislation will likely be positive to the financial health of the Canadian economy, the short term is going to be a little unsettling for those who already have high household debt levels.
These changes can potentially impact them on two levels.
First, it is going to be more difficult to qualify for a bank or institutional mortgage due to both shorter amortization periods available and a lower maximum amount of total debt servicing as a percentage of total gross income allowed for insured mortgages.
Second, you will now need more equity in your home to be able to qualify for any type of institutional home equity loan or mortgage refinancing action to consolidate debt.
The impact on private mortgage lending is that there is going to be a growing demand for both first and second mortgages in the coming years.
For debt consolidation, a private second mortgage is going to be easier to secure, and the same can be said for a new first mortgage either for debt consolidation or purchase.
And even though private financing is short term borrowing, it will provide time for homeowners to adjust their spending and overall debt levels so that they can once again qualify for bank or institutional mortgage financing.
On a cash flow basis, a private mortgage may actually afford a lower level of debt servicing to the borrower as most debt servicing requirements are interest only so even if the rate of interest is higher than bank debt, the lack of principal repayment can help to produce a lower cash flow in the short term.
There is also a wide spectrum of private money out in the market, so stronger credit and financial profiles can attract better rates which can reduce the gap between conventional and private money interest costs.
While a private first or second mortgage may not be your first choice, it may become a necessary alternative, depending on how this new rule changes impact you directly.
One of the best ways to figure out what steps to take in the short and long term with your mortgage financing is to give us a call so we can go through your situation with you and discuss different financing options available to you in the market.