New mortgage rules come into effect today

On June 21, Finance Minister Jim Flaherty announced four new rules for government-backed insured mortgages with loan-to-value ratios (LTV) of more than 80 per cent:

  • Reduce the maximum amortization period to 25 years from 30 years.
  • Lower the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent of the value of their homes.
  • Fix the maximum gross debt service ratio (GDS) at 39 per cent and the maximum total debt service ratio at 44 per cent.
  • Limit the availability of government-backed insured mortgages to homes with a purchase price of less than $1 million.

The new rules come into effect today, July 9.

How Do The New Mortgage Rules Affect You?

If you are a home buyer looking to buy with less than 20% down payment, you will probably find it harder to get the mortgage you want. Depending on your personal circumstances, you may need to save more for your down payment, or buy a smaller home so that you can get your mortgage approved.

For example, if your income is $75,000 per year and you’ve saved $30,000 as down payment, under the old rules, you would be able to get a mortgage of about $540,000. With the new rules, the maximum mortgage you would get will be reduced to about $420,000. That’s a difference of $120,000!

Table 1 - Example of Impact on Purchase Price for Home Buyers

 

New Mortgage Rules

Old Mortgage Rules

Annual Income

$75,000

$75,000

Down Payment

$30,000

$30,000

Interest Rate

3.39%

3.39%

Maximum Amortization

25 years

30 years

Maximum GDS

39%

44%

Maximum Mortgage Qualified

$420,000

$540,000

Maximum Home Price (mortgage + down payment)

$450,000

$570,000

 So if you have been thinking of that $570,000 dream home before, you need to think again now. You can look for something that’s up to $450,000, or you will have to come up with extra money for your down payment.

Impact on the Canadian Real Estate Market

The impact of the new mortgage rules is expected to be significant. This is the fourth time since 2008 the government has tightened mortgage rules for CMHC insured mortgages. Combined with the earlier changes and the new OSFI bank regulations for underwriting residential mortgages released on June 21, 2012, many believe that the measures will have an impact on the Canadian housing market by forcing some potential home buyers out of the market.

The questions are how much, and how quickly?

The Finance Minister said Ottawa expects that less than 5 per cent of new home purchasers will be affected by the changes. That means some people will choose not to buy a home.

"It will also mean that some people will buy less into the market, so they’ll buy a less expensive home or a less expensive condominium," he said. 

CIBC deputy chief economist Benjamin Tal estimated it could reduce new sales on homes by between 3% and 5%.

Craig Alexander, chief economist at Toronto-Dominion Bank, said it will likely reduce high prices by 5 percentage points from what they otherwise would have been.

The new rules are likely to have the greatest impact on first-time buyers looking for mid-priced homes. Economists say that Mr. Flaherty is delivering the equivalent of a 1-per-cent increase in interest rates with the cut to amortization.

The Canadian Association of Accredited Mortgage Professionals estimates that 40 per cent of buyers have recently been choosing amortization periods longer than 25 years.

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Antonia Yan

Antonia Yan

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CENTURY 21 Leading Edge Realty Inc., Brokerage*
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