Federal Finance Minister Jim Flaherty announced tighter mortgage rules on Monday to address concerns over high Canadian household debt. According to the Department of Finance’s press release the adjustments were made in an attempt, “to support the long-term stability of Canada’s housing market and support hard-working Canadian families saving through home ownership”.
The changes will impact buyers and current home owners who require mortgage default insurance provided by the Canadian Mortgage and Housing Corporation (CMHC) to purchase or refinance their homes. It is a requirement to have this type of insurance if you are putting down less than 20% of the purchase price of your home or refinancing above 80% of the value of your home.
Flaherty unveiled three main changes for CMHC insured mortgages:
* The maximum amortization period for a government-insured mortgage was lowered from 35 to 30 years. * Maximum borrowing limit from 90% to 85% on refinances * Government insurance backing on home equity lines of credit, or HELOCs, has been removed.
The adjustments regarding amortization and refinancing will be effective March 18, 2011 and the Home Equity Line of Credit change will take effect on April 18, 2011.
What do the new mortgage rules mean to someone considering purchasing a home this year? Firstly, it means that you should speak to a Mortgage Professional as soon as possible to determine if qualifying for a mortgage after the new rules come into effect will be difficult for you.
If you are putting less than 20% down, and have been counting on a 35 year amortization to allow you to qualify or to make your monthly payments manageable then it may be vital to make a move before March 18th.
Likewise, current homeowners who were hoping to withdraw up to 90% of there home equity for debt consolidation, home renos, investing etc., will need to do so before this date as well. For instance, if your home is valued at $300,000, the reduction of the maximum borrowing limit by 5% can mean taking access to about $15,000 in equity off the table.
However, it is important to note that if you have a downpayment that is 20% or more than the purchase price of the house you would like to buy, as it stands, you will still have access to the 35 year amortization. These types of mortgages, referred to as conventional mortgages, do not require mortgage default insurance in most cases so amortization is at the discretion of the individual lender. Indeed, sub prime lending will probably also continue to offer the longer amortization options.
The withdrawal of insurance for HELOCs will have the least impact on the average homebuyer as most lenders do not obtain mortgage insurance for HELOCs anyway. Only a small fraction of lenders repackage and securitize these loans and they may be forced to temporarily withdraw HELOCs from their product line up but Home Equity Lines of Credit currently provided by the major banks should remain unaffected.
For the long term, these seem to be prudent adjustments that strike a nice balance between preventing over-borrowing with the legitimate home ownership aspirations of first-time buyers as no change to the required minimum payment was announced. In addition, the lowering of the amount that can be borrowed against home equity should ensure Canadians retain more equity in their homes. According to the Finance Minister, the latest changes to Canada’s mortgage rules, “will promote saving through home ownership and limit repackaging consumer debt into mortgages.”
Watch for our next post where we’ll have a look at what others are saying about the changes to Canada’s mortgage rules.