In recent history, it seems that the mortgage rules have been changing every couple of years. I remember back in 2003 when I purchased my first house that the maximum mortgage amortization was 25 years. Then, someone came up with the great idea to make housing more “affordable” by increasing mortgage amortization to 30 years, then to 35 years, finally to 40 years. Over the past few years, they started reverting back amortization bring it back down to more reasonable levels.
What exactly is CMHC? It’s mortgage insurance for clients with less than 20% down payment. Even though the client pays the premium, it doesn’t insure the client, it insures the bank in case of client default. CMHC basically takes the risk away from the bank for backing a high loan to value ratio mortgage.
Related: How CMHC Works
The Mortgage Rule Changes and Implications
Reduced Amortization. Perhaps the biggest change in the mortgage rules is the reduction in maximum amortization from the previous 30 years to 25 years. What does this mean? Simply that mortgage payments just got a bit more expensive for new home buyers. For example, a $200k mortgage @ 3.5% over 30 years is $895/month but over 25 years, the payments are about $1,000/month. However, in the big picture, more of the payment will go towards the principal thus less interest paid over the term of the mortgage.
Reduced Refinancing Amount. For existing home owners looking to tap into their home equity, the maximum loan to value has been decreased from 85% to 80%. What does this mean? Simply that if you have a $100,000 home that is paid off but looking to obtain a home equity line of credit, you would eligible to borrow up to $80,000 instead of $85,000. Having this rule also implicitly saves homeowners money, as before, any amount borrowed greater than 80% of equity available required a CMHC fee.
Changes to Qualfying Ratios. When applying for a mortgage, the bank will run a couple of debt ratios to see if you qualify or if the debt burden is too much. The Gross Debt Service Ratio (GDS), which is a ratio of gross income to housing costs, now must be less than 39%. The Total Debt Service Ratio (TDS), which is the ratio of gross income to housing costs plus other debts, must be less than 44%. I don’t see this being an issue as these ratios were more restrictive in the past (see article below).
Related: Mortgage Qualifying Debt Ratios
No More CMHC for Million Dollar Homes. When the new rules come into affect (July 9, 2012), houses that sell for over $1,000,000 will not longer qualify for CMHC insurance. What does this mean? Basically that any house in that price range will require at least 20% cash as a down payment. I can see this slowing down more expensive markets like Vancouver and Toronto.
What do I think of the changes? Personally, I like them! Even though it’s a bit of hand holding by the government, the fact of the matter is that most people do not understand what they can reasonably afford. Most think that if the bank will give it to them, then it must be ok. These changes basically bring the mortgage rules in line with what they were for many years in the past.
Back to you , what do you think of the new mortgage rules?If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).