From my home in Montreal, I have a good view of the U.S. real estate market. The housing correction has had a serious impact on the American economy. As home values have decreased, many people owe more on their mortgages than their homes are worth. The number of foreclosures and short sales has increased significantly.
The Canadian government has recently implemented new standards to prevent a similar occurrence in this country. The impact of these rules on relocation is that employees being transferred to higher cost cities such as Toronto and Vancouver might not qualify for a new mortgage based on the higher value of homes comparable to those in their origin location. These employees would consider buying more affordable homes, or renting.
Canada’s new lending requirements went into effect on April 19 and pertain to borrowers applying for high ratio, or government-backed, mortgages. Borrowers who need financing for more than 80 percent of the home’s value receive high-ratio mortgages. In Canada, the amortization of a mortgage is typically 25 years. The interest rate can be open and would fluctuate with the prime rate, or would be renegotiated every one, two, three, four, or five years depending on the original agreement.
These measures have been implemented as the Canadian housing market has been hot: the average price of a home has gone up 95% from January 2000 to January 2010. In addition, interest rates have been at record lows.
With the increase in values, the Canadian government elected to take precautions against a market correction. Its goal is to ensure that homeowners have liquidity in the event that prices depreciate. It also wants borrowers to be able to afford increases in mortgage rates.
The new rules include:
1) All borrowers must meet the standards for a five-year, fixed-rate mortgage, even if they choose a variable mortgage with a lower rate or a shorter term. The standards for the five-year terms are the most strict.
2) The maximum Canadians can withdraw when refinancing their mortgages drops to 90 percent of the value of the home, from 95 percent.