New Mortgage Rules Coming into Effect
If you look at any recent housing market survey, you'll notice a common trend. The Canadian real estate market is cooling, but definitely not popping. We're actually heading into a more balanced market in most of the country. In spite of this, the Government of Canada has announced more changes to government-backed insured mortgages in the hopes of limiting the amount of household debt Canadians have and to cool the housing market further.
Four changes were announced came into effect on July 9, 2012.
Reduce the maximum amortization period to 25 years from 30 years.
With a shorter amortization, homeowners will be facing higher payments, but will be debt free faster. This will also affect how much home buyers will qualify for in their mortgage. Robert Kavcic, Economist for BMO Capital Markets told the Financial Post that the change would be similar to a mortgage rate increase of about 1%, assuming current 5-year fixed rates (3.3%) on an average priced home ($363,000).
Lower the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent of the value of their homes.
For most homeowners, this change won't make a lot of difference. This option is often used for people who need access to a large amount of equity for big ticket projects like renovations.
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 help determine how much you can afford to pay for a home. CMHC recommends that your gross debt service ratio (looks at a person's monthly housing costs in comparison to their gross monthly income ) should be 32% or less and your total debt service ratio (looks at a person's entire monthly debt load compared to their gross monthly income ) shouldn't be more than 40%.
Limit the availability of government-backed insured mortgages to homes with a purchase price of less than $1 million.
The Canadian Real Estate Association forecasts the national average home price will rise 2.2% to $370,000. Even the average home price in markets like Vancouver and Toronto are much less than the $1 million dollar cap being imposed. Borrowers purchasing homes over the new cap will be required to pay a down payment of 20% or more.
There will most likely be a flurry of activity as these changes take place with home buyers hoping to get their sale completed before the cutoff. Keep in mind that these changes affect government-backed insured mortgages only and there may be other mortgage options that are right for you. A mortgage professional can help find the right mortgage product for you.