Additional mortgage changes

Still more new mortgage rules

The government has announced that as of July 9, 2012, new rules will apply to government-backs insured mortgages where the borrower has less than a 20% downpayment.

The government will:
• reduce the maximun amortization (pay back) period on a mortgage to 25 years from 30 years;
• lower the maximun amount borrowers can refinance to 80% loan-to-value (LTV) for 85%;
• limit the Gross Debt Service (GDS) ratio to a maximum of 39% or income. The GDS ratio represents the amount of household income spent on the mortgage, property taxes and heating;
• limit the Total Debt Service (TDS) ratio to a maximum of 44% of income. The TDS ratios represents the amount of household income spent on all debts including the mortgage; and
• limit government-insured mortgages to homes prices at less that $1 million. Buyers of homes prices at $1 million or more must have mumimum 20% downpayment.

The new rules apply to mortgages on residential property with four units or less. They DO NOT apply to:
• mortgages with a 20% downpayment or more which don't require government-backed mortgage insurance;
• borrowers renewing their existing insured mortgages, where there are no new funds being added to the mortgage; or 
• development or construction or multi-unit bulidings of five units or more, owned by a landlord.

Federal Finance Minister Flaherty explained that the reasons for the changes are to "keep the housing market strong, and help ensure households do not become overextended."
This explanation doesn't make sense to Cameron Muir, BC Real Estate Association's chief econmist.
"Instead of helping make the housing market strong, the new rules will erode the purchasing power of first-time buyers who will be restricted to borrowing less money for their homes."
Muir explains the effect of the changes is the equivilant to having a 1% increase in interest rates. This translates into about $50 more on each monthly payment for every $1000,000 of mortgage loan.
What this means is new buyers who can afford a home today with a benchmark price of $625,100 will now only be able to afford a home prices at $550,550 under the new rules. This is a potential loss of $74,550 in buying power.
"Given that the market is already slowing, the new rules are totally unnecessary," says Muir.

What will the new rules cost buyers refinancing a home values at $625,000?
• When refinancing at 85%, the home owner can access up to $531,250.
• When refinacing at 80%, the home owner can access up to $500,000.
What about the new rule limiting mortgage insurance on homes prices a $1 million or more?

Four years of tightening borrowing rules
This is the fourth time in four years that the government has tightened borrowing rules.
• In 2008, the government reduced the maximum amortization period to 35 years from 40, required home buyers to have a minimum downpayment of 5% (compate to the previous 0% down), and introduced new loan documentation standards.
• In 2010, the government required all borrowers to meet standards for a five-year fixed-rate mortgage, reduced the maximum amount borrowers could refinance to 90% from 95%, and for non-owner-occupied investment properties, requred a minimum 20% down payment.
• In January 2011, the government reduced the maximum amortization period for government-backed insured mortgages to 30 years from 35 years and reduced the amount borrowers could refinance to 85% from 90%.

What will the new rules cost home buyers?

Note: calculations assume a 10% downpayment. $625,100 is the benchmark price of a home in the REBGV area as of June 1, 2011.

Article from RealtorLink, July 13, 2012, Volume 13, Number 14


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