As of July 9th, 2011, new mortgage rules have taken effect in Canada. If you knew that, go ahead and give yourself a pat on the back. If not, reading this post is probably going to be worth your time.
The changes brought on by Finance Minister Jim Flaherty contain 4 main elements, all of which we’ll evaluate here. Some of the rules will make straightforward sense, but others might be a little more difficult to understand.
The first, and probably the simplest rule to understand revolves around some of the most expensive houses. With the new changes, you can no longer get an insured mortgage (less than 20% down) on a house with a selling price over $1 million. Well, I’d like to think this makes a lot of sense. Just because you can come up with a 60,000 dollar down payment doesn’t mean you should buy a $1.2 million dollar house. In fact, that kind of down payment is more appropriate for a $300,000 purchase. Regardless, if you’re buying a house for $1 million or more these days, you’re going to have to open the wallet in advance.
Secondly, the newest rules around re-financing mean that you won’t be able to borrow more than 80% against your equity in your home. This of course is down from 85% prior to July. This is certainly something to keep in mind when refinancing and also a consideration to make in anticipation of an eventual rise in interest rates.
Both the 3rd and 4th new rules have been put in place because they apply to a large portion of the buyer pool. Primarily, the new rules limit the amount of strain Canadians can take on.
By reducing the maximum amortization period for a mortgage from 30 years down to 25 years, the minimum monthly payment is certainly slated to increase. However, the changes aren’t trying to make mortgage payments less affordable, but rather to prevent the prospective buyers with the highest-risk of defaulting from entering the market. In a way, the government is ultimately protecting us from ourselves while also saving us thousands -in some cases upwards of $100,000- in interest payments over the length of the mortgage.
This goes hand-in-hand with the capping of both gross debt service and total debt service at 39% and 44% respectively. This ensures that at least 56% of a person’s income is kept free for living expenses and savings; so that the mortgage fund doesn’t fall victim to pirating to cover other expenses. All in all, it makes for a more sound mortgage system by mitigating the risk of default, especially among riskier buyers.