Mortgage rules in Canada, as in anywhere else in the world, are constantly changing. In 2012, the rules were updated for the fourth time in a period of four years. According to the Financial Post, half of the Canadians were not even aware of the changed rules that were implemented in July 2012. It is important for buyers, especially first time home buyers, to check these rules time and again to make sure that they are on the same page as the lenders.
Change in mortgage rules are tighter and more restricted, but have been considered helpful in “cooling down” the housing market. Following are the updated rules that were put into action since 9th July 2012.
Amortization
Although the amortization rate is still at the discretion of the lender, and can be availed for a period of 30 and 35 years, the amortization rate for high-ratio mortgages have been reduced for down payments of less than 20%. According to the new rules, if an individual pays less than 20% as down payment, then the maximum amortization period allowed is 25 years. Previously individuals were allowed a 30-year amortization period on the same amount of down payment.
The new rules are also aimed to cut down on household debts which were on a constant rise. On an estimate, a family will be able to borrow $50,000 lesser on a household income of $75,000, when compared between a 25 year and a 30 year amortization.
Loan to Value Ratio
Home equity loans can now only be issued for a maximum of 80% of the property’s value, instead of 85%. However this rule does not change much as lenders more often than not did not exceed 80% as it was.
CMHC Insurance Limit
Canada Mortgage and Housing Corporation Insurance will not be applicable to home prices of over a million dollars. So for an individual wishing to purchase a house exceeding that amount will need a 20% down payment, a total of $200,000 on a house worth 1 million. However, this new change will only affect 1% of households.
Debt Score
The maximum gross debt score is 39% whereas the total debt score is 44%. It means that individuals will not be allowed to spend more than 39 percent of their gross household income on mortgages. It is especially beneficial for first time home buyers, as initially it is all the more difficult to manage finances and mortgages.
The changes in mortgage rules are aimed to provide stability and growth in the overall Canadian economy which too invariably suffered after the 2008 economic crisis. According to a mortgage expert at the Bank of Montreal, the updated rules will also help individuals in attaining their long term goals sooner due to the 25 year amortization limit. If the mortgage was approved prior to 9th of July 2012, then the property can close by 31st December 2012 at the latest.