Understanding the recent Mortgage Rule Changes
The Government of Canada, like a Dad trying to teach their 12 year old kid about saving, has made more changes to the Canadian Mortgage rules, whether you wanted them to or not.
These rules are unlikely to affect you dramatically if you already own your home, though for those struggling to purchase their first home it will likely have an impact on you, especially those in the BC Lower Mainland and Toronto.
First thing to remember is that these changes only impact high ratio mortgages in Canada, so anything where someone has less that 20% down payment or equity in their home. For those with more than 20%, what we call “conventional” mortgages, the changes will not impact on you whatsoever.
Let’s review the rule changes that are effective July 9th:
- Maximum amortization of 25 years (lowered from 30). This is going to hurt those that were on the edge of qualifying for their purchase due to debt service ratios. As an example, on a $300,000 mortgage, the difference between a 25 year amortization and a 30 year works out to $153 more per month for the 25 year.
- Maximum purchase price for less than 20% down purchases is now $1 million (no limit previously). This will have some impact on those in the most expensive areas of the country like Vancouver’s West side, where even a basic family home can reach into the $1 million range.
- Maximum Refinance Loan to value lowered to 80% (from 85% previously), this will not affect many Canadians, though it could mean less will be able to pay off more expensive means of credit like credit cards and Line of credits through debt consolidations.
- Maximum Debt Service Ratio Limit changes:
- For clients with beacon scores less than 680 the maximum Gross Debt Service ratio (GDS) cannot exceed 35%. The Total Debt Service (TDS) cannot exceed 42%
- For clients with beacon scores equal to or greater than 680 the maximum Gross Debt Service ratio (GDS) cannot exceed 39%. The Total Debt Service (TDS) cannot exceed 44%
These rules while changed officially, were pretty much in force with most lenders already, so will not be noticed for the most part.
While none of these are extremely dramatic changes, they will affect certain groups of Canadians, and in my opinion, were not needed.
Like previous changes made, the Government has allowed those with existing high ratio mortgages to continue onwards, though if people wish to add funds to their mortgages, they will have to follow the new rules for qualifying.
What this points out again, is that the “good old days” of easier qualifying for mortgages from 2007 and before are gone. With all of the issues the world has seen in credit and risk over the past 5 years, it probably makes sense as a whole, to make those with more risk pay more for their credit, though sometimes it is a bitter pill to swallow. Expect that in the next few years as the pendulum swings, it is going to be harder than before to get a mortgage. Your credit score, your income that shows on your T4 or notice of assessment from Canada Revenue Agency and the amount you are putting down (the more the better) will all be very important to your chances of qualifying.
If you have any specific questions, please feel free to ask me or my team at anytime.
Thanks and have a great summer!
Michael Anthony Lloyd
