Federal Finance Minister Jim Flaherty announced tighter mortgage rules today to address concerns over high Canadian household debt. According to the Department of Finance’s press release the adjustments are aimed at efforts to “strengthen Canada’s housing finance system” as a whole.
The changes will impact buyers and current homeowners who require mortgage default insurance provided by government backed mortgage insurance companies 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 four main changes for CMHC insured mortgages:
- The maximum amortization period for a government-insured mortgage was lowered from 30 years to 25 years.
- Maximum borrowing limit from 85% to 80% of the value of the home on refinances.
- Limiting GDS to 39% and TDS to 44%, regardless of credit score.
- Maximum purchase price for government-insured mortgages is $1 million.
The changes regarding amortization and refinancing will be effective July 9th 2012.
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”/contact/ as soon as possible to determine if qualifying for a mortgage after the new rules come into effect will be difficult for you.
Flaherty states, “What we anticipate is less than 5 per cent of new home purchasers will be affected by these measures.”
If you are putting less than 20% down, and have been counting on a 30 year amortization to allow you to qualify or to make your monthly payments manageable then it may be vital to make a move before July 9th.
What do the new mortgage rules mean to a current homeowner that was considering refinancing this year?
Current homeowners who were hoping to withdraw up to 85% of their 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 down payment 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 30 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.