In the past four years, Ottawa has tightened the mortgage rules four times, including the most recent change which was announced on June 21st. However, a recent poll released by BMO found that only half of Canadians were familiar with the new mortgage rules that took effect on July 9th, 2012.
According to the 2012 CMHC Mortgage Consumer Survey, recent buyers are exploring their mortgage options and are actively engaged in the mortgage process. In other words, mortgage literacy among Canadians has been steadily improving. So, why are so many unaware of the new mortgage rules?
With only two weeks between Jim Flaherty’s original announcement to the actual implementation of the new lending rules, little time was for Canadians to fully absorb how they would be affected.
Below we’ll detail each new mortgage rule to educate you on how they can impact you.
RULE CHANGE #1
If you plan on purchasing a home with less than a 20% down payment, it is mandatory to obtain mortgage default insurance. The maximum amortization now available for these insured mortgages has been reduced from 30 years to 25 years. The new shorter max amortization period of 25 years will result in higher mortgage payments and reduce your affordability. To quantify this mortgage change we will use the average Canadian home (approx. $370,000) as an example and input it into Ratehub’s mortgage payment calculator. From there we’re able to show how a monthly payment with a 25-year amortization differs from that with a 30-year period.
The difference between a 25-year and a 30-year amortization:
Difference in $
|Monthly mortgage payment||
|Interest paid over the life of the mortgage||
*the following calculations were made assuming a 5-year fixed rate at 3.04%
Although the 25-year amortization requires almost $200 more in mortgage payments a month, you will actually end up saving more than $35,000 in interest.
RULE CHANGE #2
Homes over one million dollars will no longer be eligible for mortgage default insurance. For example, if you are purchasing a home valued at $1,000,000, you will be required to provide a minimum down payment of $200,000, or 20% of the value of the home. Previously, if you were looking at a $1,000,000 property, you could have provided a down payment as little as $50,000 (5% down payment), but then would require mortgage default insurance.
RULE CHANGE #3
Starting July 9th, during a mortgage refinance, the maximum equity that you can access has been reduced to 80% of your home’s value, down from 85%. Take the following example:
- Value of your home: $400,000
- Your current mortgage balance: $150,000
The maximum amount of funds you can access through equity is calculated as follows:
- Funds available = Value of home * 80% – current mortgage balance
- Funds available = $400,000 * 80% – $150,000
- Fund available = $170,000
RULE CHANGE #4
The maximum gross debt service ratio (GDS) and maximum total debt service (TDS) are capped at 39% and 44% respectively. The GDS and TDS are ratios that lenders use to determine your ability to make mortgage payments. This rule is to ensure that the size of your mortgage debt and payments stay manageable relative to your household income.
Currently, Canadians are enjoying historically low mortgage interest rates, which helps reduce the cost of purchasing a new home. However, it is advisable to seek the help of an experienced Canadian mortgage broker to help you understand what is truly affordable in your situation.Google+