In a bid to save Canadians from themselves, Ottawa has tightened some lending rules for CMHC-insured mortgages.
Finance Minister Jim Flaherty has been expressing concern about Canadians' record household debt levels for about a year, especially in light of a persistent housing boom in most large cities.
One thing hasn't changed: it's still possible to buy a home with a small downpayment. If you have 5 to 20 per cent to put down, you need to qualify for mortgage insurance to get a prime mortgage, and that generally means CMHC (Canada Mortgage and Housing Corporation).
As of July 9, the following changes will affect you, but only if you need a CMHC-insured mortgage. They don't apply to conventional mortgages.
- The maximum amortization period is 25 years, down from 30 years. (Note that current pre-approved mortgages with 30-year amortization are not grandfathered. Unless a purchase is made before July 9, the amortization on the pre-approved, CMHC-insured mortgage will be reduced to 25 years.)
- Homes over $1 million are no longer eligible for CMHC-insured mortgages.
- The maximum amount you can borrow to refinance your mortgage is 80 per cent of the value of your home, down from 85 per cent.
- You can only qualify for CMHC insurance if your maximum gross debt service (GDS) is 39 per cent and your maximum total debt service (TDS) is 44 per cent (down from 45 per cent). These numbers refer to the percentage of your income needed for all housing costs (GDS) and the percentage required for GDS plus other debts (TDS). Some lenders may have lower guidelines.
The Finance Minister says these measures are aimed at slowing down a housing market that looks overexcited, and preventing Canadians from stretching themselves too far to buy a home in a hot market. "What we anticipate is less than five per cent of new home purchasers will be affected by these measures.... Some people will buy less into the market.... I consider that desirable."
Check with your Realtor or mortgage broker for more information. Meanwhile, here is an FAQ on the changes.
At the same time, new regulations aimed at conventional mortgages came down from OSFI, the federal organization that oversees the finance industry. These should have little effect on CMHC-backed mortgages. Mostly they direct financial institutions to check and verify borrowers' identity and ability to pay -- things we hope the lenders are already doing.
The biggest change affecting consumers is in home equity lines of credit (HELOCs). The maximum loan-to-value ratio for these will now be 65 per cent, down from 80 per cent.
This change addresses widespread concern that Canadians are borrowing too much against the equity in their homes. The government wants home ownership to be a vehicle for saving, not spending.