NEW MORTGAGE RULES EFFECTIVE MARCH 18, 2011: PER UPDATE FROM THE ROYAL BANK OF CANADA:
"Since October 2009, the Government of Canada has been systematically tightening mortgage financing regulations for all federally regulated lenders. The changes have been made in order to ensure that Canadians are prepared for higher interest rates in the future by not taking on too much debt, which will improve the stability of Canada's housing market.
On January 17, 2011, Federal Finance Minister Jim Flaherty announced additional changes to the rules for government insured mortgages.
The three new measures that have been announced are as follows:
New Guidelines – Effective March 18th 2011
1) Lowering the maximum amount consumers can borrow when refinancing their home.
This change will lower the maximum mortgage amount for refinances to 85% of the appraised value of the property from the current 90%. This change will help to promote savings in homeownership and ensure that homeowners don’t become overextended by using all the equity they have built up in their home when refinancing.
2) Reducing the maximum amortization period for new government insured (default insured) mortgages:
The maximum amortization for all new default insured mortgages will be reduced to 30 years from the current 35 years. This change will help reduce total borrowing costs for consumers, helping them to build up equity more quickly.
As an example, a $300,000 mortgage with a 4.5% interest rate and an amortization of 35 years has a monthly payment of $1412.05 and total interest cost of $293,059.17 over the life of the mortgage. The same mortgage with a 30 year amortization has a monthly payment of $1512.65 but total interest cost reduces to $244,551.49. The difference of roughly $100 a month in monthly payment reduces the interest cost by almost $50,000 over the life of the mortgage.
New Guideline - Effective April 18th 2011
3) Withdrawing government insurance backing on lines of credit secured by homes
Home equity lines of credit generally offer a variable interest rate and often have no repayment terms associated with them, which exposes borrowers to an increase in interest costs should interest rates as expected. Due to an increase in the household debt associated with these loans, the federal government wants to limit the amount of equity for which these loans can be granted."
We believe that these changes are positive and will be good for all of us in the long run. To quote Finance Minister Flaherty "our measures will help improve the financial situation of households in Canada. " However, these changes will impact a segment of future homebuyers who are in the fringes of getting a mortgage approval that will allow them to purchase a home that will satisfy their needs - those "borderline" cases where a 35- year amortization period will mean a difference in getting the home that they want and need rather than settling for the second choice due to affordability issues as a result of the reduction to 30- years amortization.
If you have any further questions, please do not hesitate to call us at 416-543-8852. Also, feel free to share this with family or friends who may benefit from this new information. We will be more than happy to provide appropriate advice and guide them through the process.