This morning, The Bank of Canada announced new mortgage rules (which will take effect July 9, 2012) in an effort to control the climbing household debt levels and cool what many believe is an overheated real estate market. The Bank of Canada reportedly plans to keep interest rates low for the foreseeable future and the minimum down payment amount remains at 5%.
How Do These New Rules Impact You?
Well, here are the highlights of the tightened mortgage rules and how they could impact you going forward.
Maximum Amortization Shortened from 30 years to 25 years
- On a government-insured mortgage (meaning you have less than a 20% down payment when purchasing your new home) the maximum amortization period was previously 30 years, but has now been reduced to 25 years.
- A lot of first time home buyers utilize government-insured mortgages due to the difficulty with saving up a 20% down payment.
- Therefore, this change will largely impact first time home buyers. This could make it more challenging to qualify for a mortgage, and mortgage payments will be higher since they will be spread out over 25 years instead of 30 years. However, on the plus side, a shortened amortization means five less years of interest paid by the home owner and being mortgage-free five years sooner. The silver lining.
Home Equity Line of Credit
- The amount of equity that can be borrowed against a home has now been limited to 80% of the property’s value, as opposed to 85% previously.
When Buying A Home For Over $1-Million You Will Need A 20% Down Payment
- If you are looking to buy a home for over $1-million you will need a minimum of 20% down payment to do so. The Bank of Canada will no longer allow high-ratio mortgages (a mortgage loan for an amount that is more than 80% of the value of the property) on properties of $1-million and above.
Gross Debt Service Ratio Will Be Capped at 39%
- When you are looking to get approved for a mortgage, lenders will look at your proposed new housing costs (mortgage payment, heating costs, 50% of condo fees, and property taxes) and compare it to your monthly income.
- The new rule from The Bank of Canada now enforces that the gross debt service ratio will be capped at 39%. This means that if your gross monthly income is $3,500, you cannot be spending more than $1,365 in housing costs per month and your mortgage pre-approval amount will reflect this.
How Will These Changes Impact The Real Estate Market As A Whole?
- Only time will tell. However, from a very basic perspective, if it is more challenging for buyers to get approved for a mortgage due to these changes, we will likely see less home buyers in the market. With fewer buyers the demand for property declines, which could result in home prices declining as well.
- Finance Minister Jim Flaherty said “Less than five per cent of would-be buyers will be affected by the latest tightening of mortgage lending. Some of them won’t invest in a house now and some will be forced to buy a cheaper house.”
- At this point, we can only speculate as to the impact of these changes. I will continue to keep you up to date on market changes as we move forward.
What Should You Do?
- If you were thinking about buying a home in the next couple of months, please speak to a mortgage professional in the next week to get their advice on how this will impact you and your home financing options. It’s important to ask the questions now so that you know what your choices are.
- If you do not have a mortgage professional that you trust, please let me know and I would be happy to refer you to a wonderful mortgage professional who will take great care of you.