Mortgage rates are starting to rise, and the borrowing rules are changing. Does this mean the end of Toronto's bidding wars?

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Example: the effect of rate
changes on a $300,000 mortgage,
amortized over 25 years:

Rate	Monthly payment
3.0%	$1,420
3.5%	$1,498
4.0%	$1,578
4.5%	$1,660
5.0%	$1,745
5.5%	$1,831
6.0%	$1,919

The end of rock-bottom interest rates and tighter lending rules is disappointing to Buyers — but not entirely bad news.

While higher rates and tighter borrowing rules are sad news to prospective Buyers, those who have suffered through repeated bidding war disappointments may breath a sign of relief at the prospect of reduced competition this summer.

Several Canadian banks jumped their longer-term fixed-term mortgage rates by up to 6/10ths of a percentage point the last week of March, 2010. The move signalled the end of the historically low mortgage rates which have fuelled the real estate buying frenzy in recent months. More rate increases are expected this summer and again in autumn.

Rising interest rates mean fewer Buyers able to afford to buy homes. Some Buyers will also be knocked out of the mortgage market by a change in federal rules requiring all borrowers meet the standards for a 5-year mortgage even if they choose a shorter term.

At the same time, the rising rates — and record home prices — are pushing existing homeowners into the market, especially those who won't be able to afford their mortgage payments at the higher rates.

This means more product (resale homes) on the market, and fewer Buyers, fewer bidding wars, and significantly less upward pressure on home prices.

excerpt from the CMHC Spring 2010 Housing Market Outlook:
GTA Resale Market: Nearing a Turning Point

The resale market in the Greater Toronto Area (GTA) will put an exclamation point on 2010 with a record level of activity this year. Sales will reach six digits for the first time and price growth will be well above the historical average. This momentum, however, is expected to wane in the second half of the year. In fact, the market will look quite different by 2011 as sales levels converge back to their longer-term average and prices show little movement. The era of rockbottom mortgage rates is coming to an end and the red hot GTA housing market will begin to lose its steam.

The News

Mortgage Rates Rising From Their Historic Lows

Variable mortgage rates were not affected, but are expected to rise soon as well. Variable rates rise in tandem with the Bank of Canada's key overnight lending rate, predicted to go up by summer. Further increases in the Bank of Canada rate are expected in 2010/2011, likely resulting in cumulative increases of 2% or more in the next year or two.

Some Buyers will also be knocked out of the mortgage market by a change in federal rules requiring all borrowers meet the standards for a 5-year mortgage even if they choose a shorter term (see more on this below).

Canadian Government tightens mortgage lending rules

New requirements take effect April 19, 2010

The federal government announced in February stricter mortgage rules to make sure that borrowers can make their payments even if mortgage rates rise.

The new rules will require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This change is to help Canadians prepare for higher interest rates in the future.

The rules lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. The rules also require that people who buy a property for investment have a minimum down payment of 20 per cent for government-backed mortgage insurance.

"Our Government is acting to help prevent Canadian households from getting overextended, and acting to help prevent some lenders from facilitating it," said Finance Minister Jim Flaherty. "These measures demonstrate the Government is committed to taking action when necessary to support the long-term stability of a sector that is so vital to our economy and the financial well-being of Canadian families."

Department of Finance News Release
(February 16, 2010):
The Honourable Jim Flaherty, Minister of Finance, today announced a number of measured steps to support the long-term stability of Canada's housing market and continue to encourage home ownership for Canadians.

"Canada's housing market is healthy, stable and supported by our country's solid economic fundamentals," said Minister Flaherty. "However, a key lesson of the global financial crisis is that early policy action can help prevent negative trends from developing."

The Government will therefore adjust the rules for government-backed insured mortgages as follows:

Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.
Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.
Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

"There's no clear evidence of a housing bubble, but we're taking proactive, prudent and cautious steps today to help prevent one. Our Government is acting to help prevent Canadian households from getting overextended, and acting to help prevent some lenders from facilitating it," said Minister Flaherty. "If some lenders aren't willing to act themselves, we will act. These measures demonstrate the Government is committed to taking action when necessary to support the long-term stability of a sector that is so vital to our economy and the financial well-being of Canadian families."

These adjustments to the mortgage insurance guarantee framework are intended to come into force on April 19, 2010.

Department of Finance Backgrounder

Ontario merges GST/PST into a new 13% HST (harmonized sales tax) on July 1

HST will not apply on the purchase price of re-sale homes

Here's how the PST will affect home Buyers and Sellers:

HST will not apply on the purchase price of re-sale homes.
HST will apply to services such as moving cost, legal fees, home inspection fees, and REALTOR® commissions.
HST will apply to the purchase price of newly constructed homes. However, the Province is proposing a rebate so that new homes across all price ranges would receive a 75 per cent rebate of the provincial portion of the single sales tax on the first $400,000. For new homes under $400,000, this would mean, on average, no additional tax amount compared to the current system.

Ontario brochure:
What's Taxable Under the HST and What Is Not? (pdf)

Transitional Rules for New Housing

Where services straddle the HST implementation date of July 1, 2010, the tax charged for the service may have to be split between the pre-July 2010 and post-June 2010 periods. However, the HST will generally not apply to a service if all or substantially all (90% or more) of the service is performed before July 2010.

Four key timelines are important (see below). All are based on the earlier of the time the consideration is either due (In general, an amount is due on the date of the invoice or the day required to be paid pursuant to a written agreement), or is paid without having become due. If consideration is due or paid,

Before October 15, 2009, HST will generally not apply (however, see above transition rules for new housing).

From October 15, 2009 to April 30, 2010, certain business that are not entitled to recover all of their GST/HST paid as input tax credit may be required to self-assess the provincial component of the HST with respect to goods or services supplied after June 30, 2010.

From May 1, 2010 to June 30, 2010, HST will generally apply for services supplied after June 30, 2010.

After June 30, 2010, HST will generally apply. An exception to this rule would be where ownership of the property is transferred before July 2010 or the invoice relates to services provided before July 2010.

With regard to the lease or license of goods, including non-residential real property, HST will generally apply to lease intervals or payment periods on or after July 1, 2010 and the general rules noted above will apply. However, where a lease interval begins before July 2010 and ends before July 31, 2010, it is not subject to HST.

With regard to the sale of non-residential property, HST is due where both possession and ownership of non-residential property occurs on or after July 1, 2010.

Generally, sales of new homes under written agreements of purchase and sale entered into on or before June 18, 2009 would not be subject to the provincial portion of the single sales tax, even if both ownership and possession are transferred on or after July 1, 2010.

The tax would also not apply to sales of new homes under written agreements of purchase and sale entered into after June 18, 2009 where ownership or possession is transferred before July 1, 2010.

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