Three months ago, Finance Minister Jim Flaherty told banks to tighten lending on their own. Now he’s doing it for them. The Department of Finance released a number of mortgage rules last Thursday that will mean large changes to housing in the years to come.
Their main purpose for these changes is to slow down the booming housing market, by restricting buying power, and reduce household debt without increasing interest rates. To stop there being a rush to get a mortgage prior to the rule changes, the government only gave until July 9th to implement the changes. So, if you haven’t made your purchase offer prior to this date and submitted for approval the changes may affect you.
So what are these changes?
- High Ratio mortgages (less than 20% down payment) must have an Amortization of 25 years or lower. This was previously 30 years.
- In order to qualify for a mortgage your GDS (Gross debt service ratio) must be below 39% down from 44%. This will lower the maximum mortgage some people can qualify for.
- Refinances may now only go up to 80%LTV (Loan to Value) thus reducing the amount of equity you can access in your property.
- Mortgages over $1 million can no longer be insured. Flaherty said ‘If someone can afford to pay a million dollars… they don’t really need CMHC. That’s not what CMHC is there for.”
- Cash back down payment mortgages look to be a thing of the past. Those people without a 5% down payment are now removed from the market.
The effects of shorter amortizations are substantial in the short term. If you have a mortgage of $300,000 it would mean your monthly payments would increase by nearly $150. This combined with the lowering in ratios mean that the maximum mortgage some people could qualify for would drop by nearly 20%! In the long term the amount you pay for your mortgage will be lower as you will be paying interest on the loan for 5 years less, so if you do qualify for a mortgage there is a silver lining.
The real effect of these changes will be felt by those who wish to refinance their mortgage. With a maximum LTV of 80% many people wishing to reduce their outstanding debt may be forced to keep their high interest rate debt. This change clearly plays into the hands of the banks. Instead of reducing household debt, like Flaherty wants, people will be forced to keep high interest credit cards resulting in higher interest payments to our Canadian banks.
The removal of insured mortgages over $1 million and the removal of cash back down payment mortgages are not going to affect as many people as the other measures. What the government is essentially saying is that, if you can afford a $1 million property, you can afford to make a down payment of 20% and if you can’t afford a 5% down payment maybe you shouldn’t be buying in the first place.
While these changes mostly relate to high ratio mortgages, there will be a knock on affect for those wanting conventional mortgages (over 20% down payment). Up until now, lenders were able to bulk insure these mortgages. The removal of insurance for deals that are greater than 20% in equity eliminates competition in an area of the market that has the least risk. It prevents the lenders who compete with the banks from being in this market and allows banks to charge more in interest for lower risk deals.
One thing is for certain, the role of a mortgage broker is becoming more and more valuable in response to these changes. Consumers should make sure they understand the mortgage market before taking the plunge. Looking out first and foremost for our clients, we always endeavor to get you the best rates and best terms for your mortgage. Now more than ever it is clear that you should get some sound, unbiased mortgage advice.