New Mortgage Amortization and Refinance Rules
Although Canada has not suffered the extreme downturn in the housing market that the United States has experienced over the past several years, the Canadian government has still been concerned about the overall debt levels of its citizens. Fearing that many people were getting into mortgages that they could not actually afford, the federal government of Canada recently altered lending rules for government-backed and government-insured mortgages. These rules will make it harder for certain buyers to get a mortgage loan, although Finance Minister Jim Flaherty and other officials believe that only about 5 percent of home buyers will be affected.
The most important question, of course, is this one: Will these new rules affect me? Let’s take a look and find out.
The New Rules
Since July 2012:
• Government-insured mortgages cannot be amortized over a period of more than 25 years. This is the third reduction of the maximum amortization period for government-insured mortgages over the past few years, down from a high of 40 years in 2008.
• Mortgage insurance is unavailable for homes that cost $1 million dollars or more.
• Government-insured refinanced loans cannot exceed 80 percent of the home’s value.
• Buyers can qualify for a mortgage only if their monthly housing expenses do not exceed 39 percent of their monthly gross income.
• Buyers can qualify for a mortgage only if their total monthly debt payments do not exceed 44 percent of their monthly gross income.
**The rules do not affect loans where buyers have a down payment of 20 percent or more. Such mortgages do not need CMHC mortgage insurance anyway, so these policy changes have no impact on those who have such loans.**
Will the New Mortgage Rules Affect Me and How?
Right away, it should be clear that you will be subject to the new mortgage rules if you cannot afford a down payment of at least 20 percent. If you qualify for a mortgage but can only afford a down payment of between 5 and 20 percent, then your monthly payment will be slightly higher than it would have been before the new rules were in place. That is because the loan will have to be amortized over 25 years instead of 30. However, the modest increase in the monthly payment will save you tens of thousands of dollars in interest over the life of your loan.
If you need a mortgage refinance, then you will have to increase the equity in your home to at least 20 percent to get a government-insured mortgage.
You will not be able to get a government-insured mortgage if your home costs more than $1 million. This can lead to higher interest rates on the loan products for which you qualify. It may also make it more difficult to buy homes in high-demand markets such as Toronto and Vancouver.
You may have to pay off more of your consumer debt in order to qualify for a government-backed loan depending on the ratio of your income to household expenses and other debts. In any housing market, of course, it is always wise to reduce your debt as much as possible to get the best loan.
Being aware of the new mortgage rules can help you make a good decision when it comes time to buy a home. Look at your finances now to see whether these rules will affect you, and start saving so that you can put enough money down to meet the loan thresholds.