Explanation of New Mortgage Rules
Last summer, federal Finance Minister Jim Flaherty announced changes to mortgage regulations across the country, aimed at reining in a hot housing market and ensuring Canadians aren't taking on more debt than they can afford.
The changes, which went into effect July 9, 2012, included reducing the maximum amortization period - the length of time it takes to pay off a mortgage - for a government-insured mortgage from 30 years to 25 years, and reducing the maximum amount for refinancing to 80% of the appraised value from 85%.
1. Lines of Credit: You can now borrow to a maximum of 65% loan to value of your property. In the past it was 80%. There are, however, a few lenders that will still go up to 75%.
2. Self-Employed: Clients who are self-employed and want to use their "stated income" (gross incomes), can go to a maximum loan to value of 65% on conventional mortgages.
3. All Variable-Rate Mortgages must use the five-year Bank of Canada benchmark rate to qualify as well as any fixed or variable terms less then five years insured or conventional must qualify on the five-year fixed Bank of Canada benchmark rate. For example, if you secure a 2 year fixed rate at 2.79%, your mortgage application will fee qualified based on the 5 year fixed benchmark with currently sits at 5.24%.
The following changes only affect purchasers who plan on putting less than 20% down payment, otherwise known as high ratio mortgages, insured through CMHCor Genworth.
These changes speak to ensuring we have a strong first-time homebuyers, who are building equity in their properties, to soften debt exposure and limit the loan to value ratios on higher priced real estate.
It is important to understand again that these current changes will NOT affect consumers providing a down payment of 20% or more.
Amortizations reduced to 25 years from 30 years, (on properties with less than 20% down payment)
A mortgage of $250,000 with a 30-year amortization at 3.09% five-year fixed rate = $1094.89 monthly payment. A mortgage of $250,000 with the new 25-year amortization at 3.09% five-year fixed rate = $1227.54 monthly payment
(Difference of $132.65 per month)
Refinancing is REDUCED from 85% loan-to-value (LTV) to 80% - no change to purchases. (It is important to note that most consumers currently choose to do refinancing to a maximum of 80% LTV to avoid insurance fees so this specific change should have very little impact)
Properties purchased over $1 million no longer will be eligible for mortgage insurance (If the home purchase price is under $1 million dollars consumers can still purchase up to 95% LTV with insurance - anything over $1 million dollars, 20% down payment is required).
GDS and TDS set at 39% and 44% if credit score is over 680 - The reduction in amortization combined with the lowered GDS ratio could affect a number of people's ability to qualify. If your credit score is below 680 you can qualify on a lesser GDS of 34% and TDS of 40.
A five per cent down payment rule still remains in effect for property values under $1 million dollars.
Mortgage brokers have access to specialty lenders in addition to mainstream banks and trust companies to help you get approved even if you fall outside the guidelines.
As the mortgage-qualification landscape becomes more complicated, it is critical consumers work with an independent mortgage professional that understands these changes and can help navigate the rules to ensure the best mortgage solution.
*Figures are for sample purposes only. Rates are subject to change. On approved credit.