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Proposed mortgage changes 2012

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Blog by Bettina Reid | March 22nd, 2012

The Office of the Superintendent of Financial Institutions of Canada (OFSI) is Canada's banking regulator and they have proposed some pretty heafty guidelines this week. Should they come into effect it could mean a significant change in the real estate market across the country...and not necessarily a good one.

The argument truly isn't whether some or all of these need to come in to effect but more that if implemented all at once it could create a burst in the bubble that everyone has feared. 

Many times when we have seen mortgage guidelines tightened over the last few years it hasn't been felt globally by all borrowers. 

Argument can be made for the proposed removal of the 5% cash back mortgages that many of the lenders out there are providing. Essentially they are concerned about the fact that these mortgages are truly 100% mortgages that were supposed to have ended a few years ago.

But the change that concerns me the most is the proposed loan-to-value ratio being implemented upon mortgage renewal. At present most lenders do not require anything when going to renew your mortgage as long as you have been good standing clients they have no reason to. But this new guideline should it come into effect would mean upon renewal a home evaluation would be required. Thus should there be a correction in the market where good standing clients have high ratio mortgages but now have no equity in their home after their term is up. The lenders would require them upon renewal to cough up the difference in order to maintain the loan-to-value ratio orginally agreed to when the mortgage was first taken on the home.

I'm not a huge fan of Garth Turner but he has a great example 

"a $400,000 condo bought with 5% down would have a 95% LTV. If, upon renewal, three years later the unit was worth $320,000, then the maximum mortgage amount offered would be 95% of the new value, or $304,000, instead of the original $380,000. In order to renew, the owner would have to hand over $76,000, less the small amount of principal paid."

To read more of his thoughts on this article:

How many people would be able to come up with or even want to come up with the difference. What this guideline is going to do is force people to sell their homes or worse have them fall into foreclosure.

It will be interesting to see what happens when the budget is released next week.

For another take on these changes