Author: Financial Awakening Blog
If you still haven’t read Step 1 – Plan ahead. Imagine where you are when you retire, I highly recommend you to read it first.
Last month, Finance Minister Jim Flaherty announced something that affect many of us investors. He tightened Canada’s mortgage industry and it will be in effect today. Yes, today! This is a bad news to us all! Some would argue that it only affect those who stretch themselves to the limit. I disagree. You will understand what my point is if you look at the big picture.
First, let’s review what’s been changed. Under the new rule:
Lenders can only issue home equity loans of up to 80% of the property value
In other words, you will no long be able to recycle as much money as you used to be from home equity line of credit. The previous limit was 85%. However, as an investor, you should not be creating such a high debt to equity ratio on any of your properties anyway. So this does not affect us much.
Maximum new amortization period is 25 years instead of 30 years
I remember last year, March 18, 2011, when they change the maximum amortization period from 35 years to 30 years, a lot of people tried to rush in the real estate market before the effective date. We are now back to 2006! I think this time, it would be the same. For a $2000 monthly payment with interest rate of 3.5%, the difference in amount of money you can borrow from mortgage is around 50k. In other words, you have 50k less purchasing power or 50k less safe zone. This is a nightmare for those who purchased pre construction condos before and closing after today. They might be quality for the mortgage yesterday, but they are not qualify for the mortgage today. What can they do? They are lucky if the builder allow them to do assignment. If not, they probably will lose all their deposit (15% to 20%). This is brutal. We learnt a lesson here. If you are planning to purchase pre construction condo, make sure you get one that the builder allow you to do assignment.
Although this affect us, this is not the big picture that I was talking about. As less people are qualify to get a mortgage loan, the housing market will cool down and the property value will eventually go down. This is not necessary a bad thing, if you have a health debt to equity ratio for all your properties. As the price go down, at least the property assessment will go down and hence hopefully the property tax (if they do not change the tax rate). People will be scared to go into the real estate market and hence more people will rent. You will have a more stable rental income.
However, on the other hand, if you do not have a health debt to equity ratio, you are in big trouble. Let’s say you have a down payment of 10% and the property value go down by 10%, the bank may ask you for the difference or threaten to sell your house. I hope this does not happy to you. Good luck.
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