The official announcement came out June 21st that mortgage rules are changing effective July 9, 2012. Below is a summary of the new mortgage rules coming into effect as well as a commentary on the affect the New Mortgage Rule announcement have had on the mortgage market so far. These new mortgage rules are only mandatory on insured mortgages or those with less than a 20% down payment.
1. Maximum amortization will be 25 years
We went from 40 to 35 to 30, now back down to 25 years. No biggie. If we compare June 2007, best 5yr fixed rate was 5.79%, 40 year amortization, 300K mortgage, monthly payments were $1592. Today, 3.09% 5yr fixed rate, 25 year amortization, 300K mortgage, monthly payments are only $1433.
2. You can now only refinance your mortgage up to 80% of your home value, down from maximum 85%
Essentially the government is getting out of the refinance business. Makes refinancing a little tougher if you don’t have an equity cushion to protect you against market value fluctuations.
3. Maximum qualifying debt ratios fixed at 39% (gross debt service ratio) and 44% (Total debt service ratio)
Nothing new here as most lenders already had internal maximum qualifying ratios based on your credit score. This really means only 39% of your gross income can go to carrying the new mortgage costs such as principle & interest, property taxes, heating and 50% condo fees if applicable. If your mortgage costs do come to 39% of your income, you then only have another 6% of total income for other debt payments
There were no signs these new rule changes were coming, but we now have an idea of what kind of mortgage rule changes we can expect when a second announcement comes from the Bank of Canada. Below are some more mortgage rule changes we can likely expect to see before the end of the year;
1. Home Equity Line of Credit maximum limit lowered to 65% of your home value, down from 80%
Since they are re-advanceable, the new limit allows you to keep your equity safe. Keep in mind you can still obtain Mortgage/HELOC combo products that will go up to 80% of your home value.
2. Cash- Back mortgages could disappear
These were our go-to replacement product when 100% financing went the way of the dinosaurs. Taking it away is meant to motivate borrowers to provide their own minimum 5% down-payment. If that’s not an option, there is still a gift from family or you can borrow it from somewhere else. There are always alternative options.
3. Self-Employed borrowers required to pass an “income reasonability” test
Shouldn’t have too big of an impact as most lenders already have internal “income reasonability” tests that a stated income applicant must meet.
With rules changing for the 4th time in 4 years it can be hard to keep up with all the new announcements. Stay tuned to our blog to keep in the loop or don’t hesitate to contact The MortgageGirls to determine how the new rules could affect your current or future financial situation.