Understanding the Mortgage Rules

“I’m thinking of buying a home but am unclear about the new mortgage  rules. Can you tell me what the changes are?” — Victoria C.

Recent government changes to mortgage rules may have some people scratching  their heads, or debating to apply for a mortgage.

The government made significant changes to the mortgage rules over the last  four years, with the most recent changes tightening qualifying conditions for  borrowers. Introduced in July, these changes affect what the Canada Mortgage and  Housing Corp., Genworth Financial and Canada Guaranty is allowed to insure and,  in part, make sure Canadians don’t borrow more money than they can afford.

Four of these changes are as follows:

1. AMORTIZATION PERIOD REDUCED TO 25 YEARS FROM 30 YEARS.  Approximately 40 per cent of all new mortgages last year were 30-year  amortizations. This rule will likely have the most impact on the average  Canadian consumer. This means mortgaged homeowners will have to pay back more,  over a shorter amount of time. Based on a 3.29-per-cent interest rate, mortgage  payments will increase by about $150 per month. For example, the difference in  qualifying for a $300,000 mortgage at an annual rate of 3.29 per cent, has gone  from $56,000 to $62,000, a difference of $6,000.

2. REFINANCE LOAN TO VALUE REDUCED TO 80 PER CENT FROM 85 PER CENT. This change means it will be significantly harder for an individual to  access the equity in their present home. Previously, you could take out 85 per  cent of your home’s value. However, this change tightens the limits further to  80 per cent, limiting the use of the equity in your home to pay off other debt  or make a major purchase. These changes will help rein in a hot housing industry  and attempt to make sure Canadians can’t  borrow more money than they can  afford.

3. NEW DEPT SERVICE RATIO GDS IS NOW 39 PER CENT, UP FROM 32 PER CENT AND  TDS SET AT 44 PER CENT. GDS, or gross debt service ratio is a measure  lenders and insurers use to assess potential homeowners level of debt. A ratio  of 35 per cent or less was acceptable. In Canada, the new rules allow potential  homeowners a ratio of anywhere from 35 to 39 per cent of gross income to go  specifically toward to your mortgage payment, property taxes, heat and 50 per  cent of condo fees (if applicable). This new change allows lenders to make  exceptions for anything over 35 per cent, up to 39 per cent. TDS, or total debt  service, is another  measure lenders use to assess whether potential homeowners  qualify for a mortgage. This ratio is set at 44 per cent on an exception basis.  TDS encompasses mortgage payments, taxes, heat, 50 per cent of condo fees if  applicable, car, lease, credit card and line of credit payments.

4. INSURANCE ONLY FOR HOMES WITH VALUE LESS THAN $1 MILLION. In  previous years, mortgage insurance was available for  properties over $1  million. This new mortgage rule change means if your home has a value of $1  million or more you must have a minimum of 20 per cent down. This new rule with  have little impact on the majority of Canadians.

THE EXPERT SAYS

CONSULT WITH A MORTGAGE PROFESSIONAL: Mortgage professionals will  outline options for you to consider. They will help you understand the mortgage  rules and review qualifying criteria. They will advise you how the new rules may  affect you.

HOW MUCH OF A HOUSE CAN I AFFORD? Determining how much house you can  afford is a function of two things: 1. How much of a mortgage you can qualify  for and 2. How much down payment you can muster. Trust your gut.  If you  feel the mortgage payment is overwhelming, it probably is. Do not overextend  yourself. Plan a budget and include monthly expenses, savings, RRSPS, TFSAs, car  repairs etc.

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