March 18, 2011 Department of Finance Mortgage Changes Part 2 of 3 – Reduced Refinancing Maximum Loan to Value

In January 2011, Canada’s Department of Finance announced a series of changes to the lending rules for Mortgages that will come into effect in on March 18, 2011 and April 13, 2011.

In part 1 of 3, Jessi Johnson and I discussed how the new rules shortened the maximum amortization from 35 years to 30 years for high ratio mortgages. In part 2 of this series Jessi Johnson will explain the changes to the refinancing rules.

Call in Jessi Johnson, Mortgage Specialist!

Like I always do, when I don’t know the answer, I call in the expert and this case, Jessi Johnson a Vancouver Mortgage Broker has been kind enough to meet with me and explain the new rules.

What does Loan to Value (LTV) mean?

According to Jessi’s site Loan-to-value ratio (LTV) is: 

The amount of the mortgage loan (liability) compared to the value of the property. This ratio is calculated by the lender prior to providing the loan.

For example, if you are putting 10% down on a purchase, the LTV would be 90%.

Maximum Refinance Loan to Value Reduced from 90% to 85%?

Under the present rules (pre-March 18, 2011), the maximum loan to value ratio is 90% for refinancing properties in Canada. The new Department of Finance rules which come into effect March 18, 2011, will reduce the maximum loan to value ratio to 85%, so that the maximum amount a person can borrow against a property when refinancing is 85% of its appraised market value of the property.

Why is Canada’s Department of Finance Doing This?

Canada’s Federal Government is worried that Canada’s real estate market is overheating.

Normally, The Bank of Canada would raise the Prime Rate to cool Canada’s real estate market. Unfortunately with the Canadian Dollar at record highs against the US Dollar and the overall Canadian economy still weak, The Bank of Canada does not have this luxury. This is because if The Bank of Canada increases interest rates it will push up the Canadian Dollar which could be catastrophic for Canadian exports which overwhelmingly go to the United States. Furthermore, increased interest rates could stall the Canadian economy as a whole which is still weak after the last recession.

with the Bank of Canada’s hands tied, the task of cooling Canada’s real estate market without cooling the overall economy, falls to the Department of Finance which can target the real estate market with measures like we are discussing in this series.

The Bottom Line

The bottom line is the the Department of Finance and the Government of Canada do not want Canadians to use their properties as an ATM machines to cash in on any increases in value of those properties which was one of the major contributors to the Housing Bust in the US. That said this change to the refinancing rules could make housing less affordable in Vancouver.

MAKE SURE to CHECK OUT Episode 3 on the New Rules on Home Equity Lines of Credit HELOCS!

First Time Buying a Home in Vancouver? You need to check out these Videos for First Time Buyers in Vancouver!

Selling a Condo in Vancouver? Questions? Check out out How to Sell a Condo in Vancouver!

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