new canadian mortgage rules The following article is a guest post by Brennan Valenzuela, a writer for Ratehub.ca, a website that allows people to compare Canadian mortgage rates. It also features a comprehensive education centre to help address common first-time home buyer questions. Ratehub is a great source for all the latest Canadian mortgage news.

The Department of Finance Canada introduced four new mortgage rules effective July 9th, 2012, which came as a surprise to many in the mortgage industry. Beginning early 2012, the Bank of Canada has issued multiple statements warning Canadians that ‘household debt was a major concern,’ but it should be up to the banks to moderate their lending habits.

Well, here we are, four months later, and the mortgage rules have tightened for the fourth time in four years. Finance Minister Jim Flaherty alluded to high household debt and a concern for the Canadian housing market as main driver for the regulatory change.

The effects of the stricter mortgage rules will act as a ‘superficial’ mortgage rate increase of approximately 1.0 per cent, i.e. achieve the same results as a mortgage rate increase.

Here are the new Canadian mortgage rules. Let’s get acquainted with the four new mortgage rules:

A) Maximum amortization is reduced to 25 years for insured mortgages

When you purchase a house or condo with a down payment less than a 20%, you are subject to mortgage default insurance (It’s the law!). Before July 9th, the maximum amortization length was 30 years for mortgages with default insurance.

What does this mean for you?

Flo Condos by Devron Developments

Shorter amortization periods will increase your regular monthly payment but allow you to pay off your mortgage debt faster. You’ll also put keep more money in your pocket as you pay less overall interest over time. However, the shorter maximum amortization length will change the affordability for a number of Canadians.

Example: Assuming you wanted to purchase a $400,000 unit at Flo Condos, the difference between a 25-year versus a 30-year amortization is $211 per month.*

*Calculations were made using a 5-year fixed rate at 2.99%

B) Homes over $1 million cannot receive mortgage default insurance

I know what you’re thinking. You’re totally set on purchasing a penthouse atop the incredible Aura. And if you know you’re going to need a mortgage, it is mandatory that you purchase the unit with at least a 20% down payment.

What does this mean for you?

I just told you. Horde lots of money, lots and lots of money for the minimum 20% down payment. In terms of the number of people truly affected, the chief economist at TD Bank believes the million dollar mortgage rule will only hit 0.1% of all million dollar home sales.

aura day exterior

Aura at College Park by Canderel

C) Borrowing home equity during mortgage refinancing

The maximum amount that you can borrow during a mortgage refinance has been reduced to 80% (down from 85%) of the value of home minus the current mortgage amount.

What does this mean for you?

It means if you want to borrow money against the equity in your home to finance a major purchase such as home renovation or vacation – you’ll have less access to funds. Less access means less Dineros for the kitchen upgrade. This is a precautionary instrument to ensure you aren’t over-extending your debt as many Americans did to themselves during the US housing crash.

D) Changes to the max gross debt service ratio and max total debt service

The gross debt service ratio and the total debt service ratio will be limited to 39% and 44% respectively. Lenders use these ratios to determine your ability to make mortgage payments. If your ratios are above those limits, lenders aren’t likely to approve you for a mortgage.

What does this mean for you?

This rule is to ensure that the size of your mortgage approval amount is manageable compared to your household income. After all, banks don’t like it much when you miss mortgage payments. It’s not good for business.

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