Changes to Mortgage Financing

More details on Finance Minister, Jim Flaherty's announced changes to Government-backed Mortgage Insurance rules in an attempt to support the long term stability of Canada’s housing market.

Changes are intended to take affect April 19th, 2010.  Please also keep in mind that the following changes are as of today and there may be changes or adjustments before April 19th.

Let’s review each change with a comparison of the current policy vs. the new one: 

Change #1

New Policy:  All borrowers must meet the standards for a 5 year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term.  This initiative will help Canadians prepare for higher interest rates in the future.

Current Policy:  All borrowers must meet the standards for a 3 year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term.

Results: The difference between the 3 year and 5 year fixed rate currently is 0.59%.  Using an example of a $250,000 mortgage amount, the borrower will have to qualify based on a payment $87.57 higher and will need to make $3,283.78 per year in additional income.  These are very small differences that will only affect the very small percentage of borrowers that are barely on the affordability line and ONLY affect borrowers with a down payment of less than 20% (needing CMHC). 

Change #2

New Policy:  Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90% from 95% of the value of their homes. This will help ensure home ownership is a more effective way to save. 
  
Current Policy:  Borrowers can withdraw up to 95% of the value of their homes when refinancing.

Results: Very few borrowers access in excess of 80% of the value of their home when refinancing as the cost of CMHC insurance often does not make exceeding 80% worth it.  Especially in cases where funds are being used to consolidate debt to save on interest.  This policy will ensure Canadians have a minimum of 10% equity saved in their homes once their balance drops below 90% and makes for a very small percentage of borrowers.

Change #3

New Policy:  Require a minimum down payment of 20% for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.
  
Current Policy:  Borrowers were required to put down 15% for government backed mortgage insurance on non-owner-occupied properties purchased for speculation.

Results: This policy will probably affect the most borrowers however when investing in non-owner-occupied properties, investors usually have the cash available to meet this requirement.  I am assuming this will not be the case for properties purchased for immediate family members (a parent, etc.) however I will keep you up to date on this as I hear more.

There were NO CHANGES announced to down payment requirements for owner occupied purchases so it looks as though 95% will continue to be the rule for purchases.  There was also no comment in regards to changes in the 35 year amortization so it looks as though that rule is also to remain in effect.

To read the announcement yourself and to see all associated details please click on the following link:   http://www.fin.gc.ca/n10/10-011-eng.asp  or feel free to contact us.