The problem is the new government rules are taking away the variable option for some consumers — up to 10% of the market, according to some people in the mortgage industry. Ottawa’s new rules mean even those with variable mortgages have to qualify based on their ability to pay the posted five-year fixed rate, now 6.1%. The Financial Post
New mortgage rules favour fixed rates, but variable rates favour your pocket
April 21, 2010
No one wants homeowners to be unable to make their mortgage payments. With the current fixed rate hikes and the Bank of Canada hinting at increasing short-term rates, that’s exactly what the government fears. So they’ve stepped in with legislation requiring everyone who signs a mortgage, regardless of the rate on that contract, to qualify for the 5-year fixed posted rate instead. The only way out of this condition is if you sign for a fixed-rate that is for a term longer than 5 years.
Mark Herman, a Calgary based broker with Mortgage Alliance, estimates that homebuyers qualifying under a variable rate will see their approval amounts decrease by 10-15%.
Variable rate mortgages outperform their fixed rate counterparts 90% of the time. So why would anyone have a fixed rate mortgage? Peace of mind. Many mortgage-holders are willing to accept paying thousands of extra dollars in interest to know exactly what their payments will be for the next five years.
Essentially, then, what the government is saying with this policy is that everyone should have that peace of mind. But should homebuyers be forced to buy into this de facto insurance policy? I mean, we don’t make people buy life insurance even though it’s probably a good idea to.
It’s all very political. Everyone’s very sensitive about housing bubbles since the giant burst in the US. And no one wants to experience foreclosures in the devastating numbers that the US did. But is this policy overkill?