IMPORTANT: Canada's mortgage rules tightening
Effective July 9, 2012, the rules for government-backed insured mortgages will tighten in Canada.
Canada’s Finance Minister Jim Flaherty has announced that:
- The maximum amortization period for government-backed insured mortgages will be reduced to 25 years from 30 years.
- The maximum amount that an individual can borrow when refinancing will be lowered to 80% from 85%.
- The federal government will set a maximum for gross debt-service ratio (GDS) at 39% and lower the maximum for total debt-service ratio (TDS) to 44% from 45%.
- Government-backed insured mortgages will no longer be available for homes with a purchase price of $1 million or more.
This latest move by the federal government — its fourth since 2008 — effectively turns back the clock to the pre-2004 state of affairs, resetting mortgage lending rules to more prudent, if conservative, standards.
What this means to you
As is often the case when rules are changed, the new rules are likely to encourage purchasers looking to take advantage of the current terms to do so prior to the deadline. Past July 9, however, the new rules are likely to restrain homebuyer demand, particularly from first-time buyers.
The reduction of the maximum amortization period to 25 years will have the most direct impact on Canadian homebuyers.
Based on a typical mortgage size ($288,000 for a bungalow) and posted mortgage rate (5.24%),
the reduction in the amortization period from 30 years to 25 years would raise a homeowner’s monthly mortgage bill by $136, representing a material increase of 8.6%. Such an increase would be the equivalent of a 75 basis point hike in interest rates.
Viewed another way, the shorter amortization period would require the qualifying income needed to purchase a home — i.e., the income threshold under which homeownership costs (mortgage payments, property taxes and utilities) exceed a ratio of 39%, as per the new GDS rule — to rise by 6.7%
The new caps on GDS (39%) and TDS (44%) should have little impact. CMHC already applies more stringent maximums for riskier borrowers and has the TDS ceiling of 44% in place for lower risk borrowers. The only change for CMHC will be the application of a 39% GDS maximum for the lower risk borrowers.
The new limit of government-backed insurance coverage to properties valued at less than $1 million could cool demand for the high-end market segment; however, the proportion of high-ratio mortgages in that segment tends to be small.
What does this mean for my Clients
For clients who have purchased a home already and were approved for financing before June 22nd, the new rules will not apply. For clients who are approved before July 9th but closing after December 31, 2012, the new default insured rules will apply. For clients who are still shopping and have do not have a firm mortgage approval, it is important that they get the right advice about the impact of these new changes to their plans. Note that mortgage pre-approval without an agreement of purchase and sale is not sufficient to qualify for a 30-year amortization after July 9th.
Talk to your RBC Mortgage Specialist today. They can help you make sense of these recent changes and also provide the right solution for your clients to balance lifestyle needs and housing affordability.