If you have your home for sale, are looking to buy a new home or may need to refinance your home in the future chances are you have kept an open ear to last week’s mortgage announcements.
Are you concerned or unsure how the changes will affect you?
Major Changes to
Canadian Mortgage Laws
Jim Flaherty’s announcement on July 21, 2012 included two major changes for Canadians with less than 20% equity:
1. Maximum Amortization Period in Canada
The biggest and most publicized change to mortgages rules is a shortened maximum amortization period (the amount of time to pay back the mortgage) which has been reduced from 30 years to 25 years. This idea of a shortened amortization period isn’t new. Up until a decade ago mortgages were amortized to a maximum of 25 years.
It’s important to understand that the shorter the amortization period the higher the monthly mortgage payments but less interest paid back in the long run. In this way the change is to your long term benefit. Use this Amortization Tool and test out the difference in monthly payments and total interest paid between 25 year and 30 year mortgages.
This does not affect existing Canadian mortgage rules down payment: the minimum down payment is still 5% and 20% for government-backed mortgage insurance.
Did you know that last year approximately, 40% of new mortgages had amortizations greater than 25 years (CAAMP)? If this proportion remains the same again for this year, these new mortgage changes will after just less than half of new mortgages. These proposed changes will only affect NEW mortgages moving forward and if trends remain the same. The changes are not retroactive and will not affect you if you already hold a 30 year mortgage.
2. Maximum Loan-to-Value Ratio Refinance
The maximum LTV (loan-to-value) ratio is being reduced from 85% to 80%. This means that if you need to refinance your home you will only be able to refinance up to 80% of the bank’s assessed value of the property.
These changes will come into effect on July 9, 2012, just 18 days after they were officially announced. In order to qualify under the old rules you will need to be pre-approved before July 9 with a purchase agreement dated prior to July 9 and a full mortgage approval prior to July 9. As you can imagine this short amount of time leaves banks, mortgage lenders and many Canadians scrambling to respond.
Does Canada Need to Change Mortgage Rules Again?
Our Finance Minister Jim Flaherty feels that it’s time to tighten up on mortgage rules to help cool the overheating real estate market in some parts of Canada. Canadian borrowers and lenders have benefited from very low interest rates in the past years and have altered their behaviour as a result.
The Bank of Canada Governor Mark Carney backs Flaherty’s position and states that our economy can’t keep depending on debt-fuelled spending, particularly if the European debt crisis spreads to North American economy. Flaherty and Carney also feel that Canadian households could come into troubles with making mortgage and other debt payments if an unemployment shock hits the Canadian economy.
Carney states that “These measures reduce the No. 1 domestic risk to the Canadian economy. What’s important is the sustainable evolution of the housing market. It does no good to have artificial strength in the housing market, or in consumption.”
Should I Purchase a Home Before July 9?
With a little more than 3 weeks to absorb the news before it takes effect a lot of lenders are scrambling. Keep in mind that many buyers may hurry to obtain 30 year mortgages before rules change, causing:
- Best rate lenders to be especially busy
- Borrowers to experience underwriting delays that may affect financing condition deadlines
- Underwriters to be especially prudent with marginal borrowers who are applying last minute
Like most real estate agents would, my advice is that unless you are already seriously considering buying and selling a home you should NOT rush into a purchase just to qualify for the old mortgage laws. There are some particular cases where it may benefit you to do so and I invite you to contact my office to discuss your individual situation.
For those close to having your offer accepted, keep in mind that the reduction in amortization period from 30 years to 25 years takes away approximately 9% of a theoretical mortgage. You may need the 30 year amortization to be able to afford the top of your price range.
Discontinuation of Mortgage Insurance
on Million Dollar Vancouver Homes
Another adjustment in mortgage regulation is the discontinuation of mortgage insurance on million dollar homes. If you are purchasing Vancouver or White Rock real estate where properties are priced at a premium the new “Million Dollar” mortgage rules may affect you. Properties over $1,000,000 will now require a 20% down payment and will not qualify for high-ratio insurance. This new rule can make it difficult to afford your first home or purchase a new home in Vancouver where 53% of single-family homes are over a million dollars.
Still have questions about the new Canadian Mortgage Rules? I am more than happy to speak with you about these changes to Canadian mortgage rules and how it will affect your interest in BC real estate.