New Canadian Mortgage Rules Come Into Effect July 9 2012
This move continues the theme of the 2011 mortgage rule changes were the Federal Government does a focused cooling of the housing market without resorting to raising interest rates which would have a negative impact on the overall economy.
What are the Changes in Canada’s Mortgage Rules?
The four major changes effective July 9, 2012 are as follows:
1) 25 Year Amortizations Only for Insured Mortgages - CMHC will no longer insure mortgages with an amortization longer than 25 years down from a maximum possible amortization of 30 years. Canadian home buyers affected by the changes will end up paying less in mortgage interest payments over the course paying off their mortgage over 25 rather than 30 years. The downside is that fewer people will qualify for a mortgage as the payments will be higher, and more income will be required to qualify for a mortgage.
2) Properties Over $1 million No Longer Eligible for CMHC Mortgage Insurance – What this means is that if you plan on buying a house over $1 million with less than a 20% down payment, forget about it. 20% down payments minimum will now be required for purchases over $ million.
3) Maximum Refinance LTV Reduced to 80% – The maximum that an existing home owner can refinance their property for has been reduced from 85% (Loan To Value) LTV to 80% LTV.
4) GDSR to 39% & TDSR to 44% - Fix the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent. This tighter mortgage approval criteria will reduce the amount of higher risk borrowers who can qualify for a mortgage.
Why is the Department of Finance Tightening the Mortgage Rules in Canada?
Canada’s Federal Government is trying to a control real estate prices in Canada to avoid a housing bubble and related crash as happened in the United States.
The Department of Finance is also concerned about both Canada’s economy and doesn’t want to throw the baby out with the bath water by raising interest rates.
With the Canadian dollar at or near parity and a weak Canadian economy, the risk of raising rates is that it will cause the Canadian dollar to increase in value beyond parity with the US dollar thus undermining Canada’s manufacturing and export sectors by increasing the cost of their products for their foreign buyers. Higher interest rates also increase the overall cost of doing business throughout the economy by increasing the cost of borrowing, again
Remember Folks! Longer Amortizations for Uninsured Mortgages are Still Available! Check out this 40 Year Canadian Mortgage Calculator for Investors!
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