New Mortgage Rules
Update: January 26, 2011
New mortgage rules will only apply to Contracts of Purchase & Sale singed after March 18, 2011.
Deals do not have to close or complete by the 18th to qualify.
March 2011 Changes
For the second time in twelve months, the Department of Finance tightened rules on residential mortgages to help slow the pace of household debt accumulation. Changes include shortening the amortization period to 30 years (which had already been shortened from 40 to 35 years in 2008), withdrawing the Canadian Mortgage & Housing Corporation (CMHC) insurance of home equity lines of credit (HELOC), and a reduction in the maximum refinance percentage from 90% loan-to-value to 85%. Changes to the amortization period and the refinancing ratio will take effect March 18 and the HELOC change will take effect April 18, 2011.
April 2010 Changes
Finance Minister Jim Flaherty is tightening mortgage rules to crack down on speculators and discourage homeowners from taking on too much debt. The minister said he is responding to growing concerns that Canada's housing market is overheating, although he stresses there is no bubble in Canada's real estate market.
For many first time buyers, the new rules will drastically affect their purchasing power and reduce the number of potential properties when searching for their first home.
All borrowers will need to meet stiffer criteria to take out mortgages.
1. In order to qualify for an insured mortgage, all borrowers will have to meet the standards for a 5 year fixed-rate mortgage, regardless if they choose a mortgage with a lower interest rate and shorter term.
For an example, lets say you make $80,000 a year and qualify for a mortgage of $400-$500k at an interest rate of 3.69%. Once the new rules are in place, that same purchaser making $80k a year will only qualify for a mortgage of $300-$400k. In the Victoria real estate market, that purchaser is now looking at 2 bedroom condos and townhomes instead of a single family detached home.
2. The government will also limit the maximum amount Canadians can borrow on their homes when refinancing a mortgage, from the current 95% of the property value to 90%.
3. To discourage speculation, prospective homebuyers who want to purchase a property for rental purposes will have to come up with a 20% downpayment, instead of the current 5% for non-owner occupied properties.
Further to these changes by the Federal Finance Minister, the Canada Mortgage Housing Corporation, CMHC, is expected to change the TDS (total debt service ratio) formula on rental properties whether Owner occupied or not, allowing just 50% of the gross rental income to be included in the borrowers gross annual income.
For many first time buyers, purchasing a home with a rental suite is a great way to offset some of their mortgage costs. As it currently stands, 80% for the rental suite income could be counted towards the mortgage. With the new rules this will soon be cut to just 50% of the gross rental income, reducing a buyers purchasing power when looking for homes with suites or suite potential.
When will all this happen?
These adjustments to the mortgage insurance guarantee framework are intended to come into force on April 19, 2010. Exceptions would be allowed after April 19 where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before April 19, 2010.
What to do?
If you are even thinking about buying a home in the next few months, it is important that you understand the impact these changes will have on your ability to purchase a property. Properties that you like and can afford today maybe unattainable after April 19th with the new regulations in place.
If you have any questions please email me & check with your mortgage professional.