Walter Monteiro's Blog

The New Mortgage Rules and Their Impacts

A few days from now (July 9, 2012), the new mortgage rules will start rolling and the bad news is that the new rules will give a big punch to lots of first-time home buyers. Since Finance Minister, Jim Flaherty, announced the new rules a few weeks ago, the media floods the market with how the new rules can make huge changes to the Canada’s housing market.

Jim Flaherty stated that the housing market is in a dangerous level due to the high level of household debts. As you might have known that in recent years the housing market in Canada has been dominated by long amortizations, low down payments, and low interest rates. The banks are also very aggressive in lending because most mortgages are backed by CMHC. The new mortgage rules are intended to save the housing market from potential problems in the future.

Here are four changes in the mortgage rules that will be effective on July 9:

1. If people are now enjoying 30 years amortization for a government-insured mortgage, the new rule reduces the amortization to 25 years. However, 30 years amortization will still be available for people who take conventional mortgages. It cannot be denied that by reducing the amortization, it will be harder for many Canadians to qualify for a mortgage because the down payment will be higher. However, the good thing is that lower amortization can help people to save lots of money in the long run.

2. Gross debt service ratio will be set at 39 percent, which is five percent lower than the current 44 percent. The main goal of reducing the ratio is to make sure that borrowers do not get irrational loan amount. For example, if your gross monthly income is $5,000 then your housing costs should be lower than $1,950. Housing costs here include heating expenses, property taxes and monthly mortgage payments. If your spouse also works, combine your salary with your spouse’s salary and multiply the result by 39 percent.

3. In terms of refinancing, the maximum amount of money that borrowers can get will be 80 percent of the value of their property, which is 5 percent lower than the current limit.

4. The government will no longer provide government-backed mortgage insurance for homes with a purchase price of $1 million and above. In other words, wealthy Canadians will no longer enjoy government-backed mortgage insurance.

As you can see, the new rules will make many first-time home buyers to delay buying a home. They need to save more money so they can pay the higher down payment. In case you are not sure whether or not you can quality for a mortgage under the new rules, you have two options to choose. The first option is to delay buying a home and increase your saving to meet the down payment. If you do not want to delay buying a home then you may consider the second option, which is lowering your budget for your new home.

Regardless of the negative impacts of the new mortgage rules to the housing market, the new rules also bring some positive impacts. The first positive impact is housing market crash that is happening in some other parts of the world can be avoided. Another positive impact from the implementation of the new rules is to make first-time home buyers become more disciplined. Even though non secured consumer credit (I.E.: credit card debt)was not changed which I feel is the real culprit, the new rules help home buyers to be more aware about their buying power so they won’t be trapped in debt.

Walter Monteiro

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