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New Rules for Mortgages on Second Homes

Posted July 15th, 2014 under smart buying, smart selling.

As of May 2014, CMHC (the government mortgage insurance agency) has stopped insuring mortgages for second homes. This means that a minimum down payment of 20% will be required to get a bank mortgage for a second home, though in many cases banks may require as much as 30% down.

Why the change? And what will the effects be?

It's important to understand that second homes are almost always investment properties. Owners treat them differently from a primary residence, and these properties play a different role in the housing market.

There are three main effects that will come of this change.

First of all, investors will have to come up with substantially larger down payments to buy second homes—as much as 20%–30% rather than 5%. Ths will have a mild but immediate cooling effect on the market by reducing the demand for certain properties. This in turn will reduce the likelihood of prices increasing out of control.

Secondly, should the market dip in future, investors will be less likely to walk away from these investment properties, because they have more to lose. Losing a 5% down payment is one thing, but losing 30% is a huge sacrifice and something most investors would avoid.

When an investor walks away from an investment property, this typically results in a Power of Sale. With fewer POS's happening, there would be fewer low-priced properties competing with people's primary residences for buyers. As a result, there would be less downward pressure on house prices, which could help to prevent a crash or rapid adjustment.

Finally, because the public is well aware of Power of Sale and Foreclosure as "red flags" for the housing market, a move that results in fewer Power of Sales could help to avoid a psychological panic.

The overall effect is to strengthen the market somewhat against runaway prices in both directions, and this is why the government has implemented this rule. With prices currently inflated by as much as 10%, the potential for an adjustment is very real, so any attempt to soften the impact of that adjustment should benefit the housing market overall.

Want to know more about the new rules for mortgages on second homes? Just ask me, I'll be happy to help.