Mortgage Rules Change Again, for the 4th Time

As of July 9, 2012 the 4th round of mortgage rule changes will take effect in Canada. These rules apply to government-backed mortgages that require default insurance.

Mortgages with an 80% loan-to-value or a 20% downpayment are considered conventional mortgages and do not require default insurance. Mortgages with less than 20% down must carry default insurance.

The Government has announced 4 measures for “new government-backed insured mortgages:

  • The maximum amortization has been reduced to 25 years. It has gone from 40 years to 35 years in 2008 and then to 30 years in 2011.
  • The maximum that can be borrowed for refinancing one’s home has been lowered to 80% from 85% of the home’s value.
  • Maximum debt service ratios will be fixed as follows:
    --39% for gross debt service ratio—this accounts for housing costs that include principal, interest, taxes and heat (PITH), and
    --44% for total debt service ratio—this accounts for housing costs plus all other debt payments (car loans or leases, credit card payments, lines of credit payments, etc.).
  • Limit government-back insurance to homes with a purchase price of less than $1,000,000.

(Source: Department of Finance Canada; June 21, 2012)

OSFI Tightens Mortgage Underwriting Guidelines As Well

The following changes to underwriting guidelines have been announced by the Office of the Superintendent of Financial Institutions Canada (OSFI). They too will have an effect on borrowing.

  • The max loan-to-value for HELOCs (Home Equity Lines of Credit) will drop to 65% from 80%. Lenders can, however, add15% amortized mortgage “on top of the HELOC”, for a total loan-to-value of 80%.
  • On conventional mortgages, for variable rates and fixed terms less than 5 years, the Qualifying Rate will be the “greater of the contractual mortgage rate or the five-year benchmark rate published by the Bank of Canada.”
  • Self-employed people must provide verification of income such as a notice of assessment—no more stated income mortgages.
  • With Cash-Back Products, the cash back can no longer be applied to all or part of the downpayment. This effectively eliminates 100% financing.

(Source: Mortgage Broker News in Canada; June 21, 2012)

Buyers Can Continue to Buy a Home with 5% Down

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