Canadian Mortgage Rules Changes: Are You in the Loop?

Canadian FlagA recent poll revealed that a surprising number of Canadians are not aware of the recent governmental changes to the mortgage market, yet these changes will impact them directly. Among the changes are debt ratio caps, government mortgage insurance changes, changes to rules regarding equity loans, and the maximum amortization period. All of these changes are expected to make things harder for some home owners and buyers to purchase and maintain a home in the short-term, though it is expected to reduce the risk of default and save Canadians money in the long-term. If you’re not in the loop, you need to be.

Debt Ratio Caps

Debt ratio refers to the amount of debt you carry relative to your income. Banks use this, called “debt-to-income ratio,” to determine whether you can afford to carry a mortgage. Because debt levels dramatically impact your ability to make mortgage payments, it’s important that you not exceed a certain ratio. Now, the Canadian government has mandated a maximum debt ratio for banks.

You will no longer be able to obtain a mortgage if your gross debt service ratio rises above 39 per cent, with the maximum total debt service ratio of 44 per cent necessary to obtain CMHC insurance.

According to Finance Minister Jim Flaherty, “Our government has encouraged Canadians to borrow responsibly. Most Canadians have done so.”  These rules will enforce good behavior and prudent money management for Canadians.

Government Mortgage Insurance

Flaherty has also tightened mortgage insurance rules several times since 2008. After each time, the national average resale price for homes has declined.

The new rules do not allow government insurance on homes with a purchase price in excess of $1 million. If history is any guide, this may negatively impact the sale of homes priced over $1 million.

Equity Loans

Equity loans are loans against a home’s equity. When you need to make improvements to your house, a common way for you to raise the funds is to borrow against the equity. In the past, this was a simple affair. You went down to your lender, and asked for a loan.

New government regulations now cap equity loans to just 80 percent of the home’s value, down from 85 percent. This encourages you to keep more of your money in your home – though this may make it more difficult for you to make much-needed improvements.

Maximum Amortization Period

The amortization period of a loan is the number of months that you pay on a mortgage loan. A 30-year loan, for example, would have an amortization period of 30 years. The government has capped amortization periods at 25 years. This represents a significant change in recent years when the maximum term was 40 years.

At 25 years, you’ll pay less interest; however, your payments will be noticeably higher than before. For example, Ottawa expects the new changes to increase monthly payments on a $350,000 home by about $177. However, interest payments should decrease by about $47,000. The government believes that less than five per cent of home owners will be affected by the changes.

With all of these changes having taken place late last year only time will tell if the clampdown will benefit homeowners. In theory, reducing the risks on home owners is a good thing. Buyers are less likely to get in over their heads. However, it also curbs investment in remodeling and home buying, since down payment requirements must increase to match debt ratio caps. Additionally, the strict home equity loan caps may tie the hands of some home buyers looking to invest their home equity elsewhere to combat the ravaging effects of inflation brought on by Canada’s persistently low interest rate environment.

If Canadians can hold out, they may see the housing market stabilize. But at what cost?

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Author Bio

Len Lane is an Owner/Broker Accredited Mortgage Professional. He especially enjoys helping first-time home buyers answer this question: How much mortgage can I afford?

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