Finance Minister Jim Flaherty announced this week that new mortgage rules come into effect on March 18th.
The big three changes:
- Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.
- Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.
- Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.
The new rules will mostly affect new home buyers with lower incomes and less savings. Until now, buyers have had the advantage of 35 year government insured mortgages if they have less than 20% down payment.
When it comes down to the numbers, the difference between a 30 and 35 year amortization period is about $100 a month. But if you’re already maxed out, this could be the difference between being approved and not being approved. The government doesn’t want taxpayers bailing out people who are over leveraged.
When I’m speaking to first-time buyers, I strongly encourage them not to spend everything they have on the down payment – we all need a contingency fund. A conscientious mortgage broker will go through all the costs of home ownership, including condo fees and a good financial planner can give advice on how much you should have in savings. The government is just ensuring we don’t carry more debt than we can afford to.
The new rules are ultimately a good thing – it will be an annoyance to people who wanted to take advantage of low mortgage rates combined with CMHC insurance and a 35 year amortization, but it won’t affect those downsizing or buying their next place.
In the past, any time we’ve seen these new tweaks where there is a trigger date, there is a flood of activity – witness what happened with the land transfer tax and HST.
If you think you might be at risk of not being approved for a mortgage under the new rules or if you do want to refinance or get lines of credit, now’s the time to do it!
Thanks to mortgage broker Scott Brown for part of the information!