Mortgage Lending Changes

I’m sure most of you have heard Finance Minister Jim Flaherty’s announcement yesterday regarding the changes to the new mortgage rules. These are the changes:

o The maximum amortization will be reduced to 25 years from 30 years. This will make things a little tougher for buyers forcing them to qualify on a 25 year amortization. On the plus side home owners will benefit by paying down more principal over the term of their mortgage.

o The maximum refinance limit is reduced to 80% of your home value from 85%. This limits the ability to access the equity in your home.
o You must have 20% or greater for down payment on purchases over $1 million dollars. CMHC will not insure mortgages on purchases in excess of $1m.

o Flaherty also moved to cap the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent in order to get CMHC insurance. Those two ratios are technical limits on how much debt a borrower is allowed to take on as a percentage of their overall income. This move, too, is aimed at making sure a borrower can’t bite off more than he or she can chew.
o These rules go into effect July 9th 2012.

o In addition to these changes the Office of the Superintendent of Financial Institutions Canada (OSFI), announced later this year that they will drop the maximum limit on Home Equity Line of Credits (HELOCS) to 65% loan to value from 80%. This will limit borrowers who leverage HELOCs for investment purposes.

1) If I already have an approval in place on my purchase, renewal or refinance, will my amortization have to be 25 years? The 25 year amortization only applies to new applications created on July 9th 2012. These new changes do not affect you if you already have a approval in place for your mortgage on a purchase or refinance. If you do not have an offer in place and you want a 30 year amortization you must make an offer by July 6th 2012, given that the banks are closed over the weekend of the 7th & 8th of July.
2) If I have a pre-approval in place for my purchase do I have to now qualify on a 25 year amortization? Yes, you must now qualify on a 25 year amortization if you make an offer after July 6th 2012. If anyone has a pending pre-approval in place you must contact me to see what your new approved limit is now that you have to qualify with a higher payment on a 25 year amortization. On a $300,000 loan based on today’s 5 year fixed rate the payment on a 25 year amortization VS. a 30 year is over $150 more a month. This will impact your ability to purchase a more expensive home.

3) If I am coming up for renewal on my mortgage will I now have to take a 25 year amortization? If you do not need to refinance your mortgage and take new money out by way of refinance you can renew on your existing amortization. So if you took a 35 year amortization 5 years ago, and you’re up for renewal you can continue on the same amortization schedule and take a 30 year amortization. This is provided you do not make any changes to the mortgage balance or who is registered on the current title.
4) If I already have a HELOC at 80% loan to value, will the bank reduce my limit to 65%? No, existing HELOCs are not affected by these changes so you can remain at 80% loan to value. Moving forward, OSFI indicated you can combine a 65% loan to value HELOC with a 15% amortized mortgage. This will give you 80% loan to value with a hybrid of a 15% mortgage and 65% HELOC.