The Department of Finance announced new mortgage rule changes in an effort to limit the amount of debt Canadians are building.
Four new changes will come into effect July 9, 2012:
Reduce the maximum amortization period to 25 years from 30 years.
By reducing the amortization period, people will face higher monthly payments, but are expected to be debt free faster.
The government said on a $350,000 mortgage with three per cent interest, it will increase monthly payments by $184 over what they would have been with a 30-year amortization. Over the lifetime of the mortgage, however, the homeowner will save $33,052 in total interest payments because the home would have been paid off five years earlier.
Lower the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent of the value of their homes.
This move is trying to encourage homeowners to manage borrowings against their homes. For most homeowners, this change will not make a lot of difference.
Fix the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent.
The two ratios mentioned are to determine affordability by CMHC. The gross debt service ratio looks at a person's monthly housing costs in comparison to their gross monthly income. The total debt service ratio looks at a person's entire monthly debt load compared to their gross monthly income. This ratio includes housing costs and all other debt payments like car loans and credit card payments.
Limit the availability of government-backed insured mortgages to homes with a purchase price of less than $1 million.
Based on MLS data CMHC forecasted the national average resale price of a home to be $372,700 in 2012 and $383,600 in 2013. Borrowers purchasing $1 million homes will be required to pay a down payment of 20% or more.
There are still mortgage options available for homeowners and buyers. If you’re considering buying or selling, contact me and I can help you to better understand the impact of these changes and put you in touch with a mortgage expert to find out what mortgage product is right for you.