Changes to the Rules for Government Insured Mortgages

Changes to the Rules for Government Insured Mortgages

 In the face of the International Monetary Fund’s comments that the Number 1 risk to the Canadian economy is household debt, Finance Minister Jin Flaherty has announced on January 17^th, three new mortgage regulations:

• Mortgage amortization periods will be reduced from 35 years to 30 years.
• The maximum amount that can be borrowed when refinancing a home will be lowered from 90% to 85%.
• The government will withdraw its insurance backing on lines of credit secured by homes.

The changes in amortization and refinancing will go into effect on March 18, 2011 while the change to home equity lines of credit will go into effect on April 18, 2011.

The first change is likely to have the greatest impact. Buyers who purchase a home with less than 20% of the value of the home are required to purchase government-backed mortgage insurance through Canadian Mortgage and Housing Corporation (CMHC).

This change will help reduce total borrowing costs for consumers, helping them to build equity more quickly. As an example:

A $300,000 mortgage with a 4.5% interest rate and an amortization of 35 years would have a monthly payment of $1,412.05 and a total interest cost of $293,059 of the life of the mortgage. The same mortgage with a 30 year amortization has a monthly payment of $1,512.65 but the total interest cost reduces to $244,551.49 a reduction of roughly $100.00 per month for a total of over $50,000 over the life of the mortgage.

Minister Flaherty called the changes “moderate” and it is of interest to note that they did not include two other proposals which could have had a significant impact on the real estate market. They did not include an increase in the minimum 5% down currently required for a home purchase and maintains the standard that only 50% of monthly condominium fees be included in the list of expenses that are measured against income when financial firms consider a mortgage candidate’s application.

When planning your home purchase, one of the first things you should do is to ensure that your mortgage financing arrangements are in place. Meet with your bank’s mortgage finance specialist or mortgage broker to secure a pre-approval and the peace of mind that when you find your dream home, your goal of ownership is achievable.