What New Mortgage Rules Mean

CMHC Mortgage Insurance Rules Changes

Effective Monday, July 9, 2012, the Canadian Mortgage and Housing Corporation (CMHC) only provides mortgage insurance for loans with an amortization of 25 years or less when the borrowed amount is 80% or more of the property value.  Canadian law requires insurance on mortgages that exceed 80% of a property's value.

Amortization - This lowers the amortization limit from the 30 year maximum set out in 2011.  It was as high as a 40 year amortization in 2006, but the amortization period has been lowered by the federal government over the past several years in an effort to encourage consumers to pay off debts more quickly.

Debt Ratios - The government has also set the maximum gross debt service (GDS) ratio at 35% and the maximum total debt service (TDS)  ratio at 42% in order to qualify for CMHC insurance if you have a beacon score of less 680.  The ratios are at a GDS of 39% and TDS of 44% if the beacon score is over 680.  We calculate the GDS by adding up mortgage payments, property taxes and heat costs, and dividing by the borrower's income. TDS adds in other debt payments such as lines of credit and credit cards to get total debt payments.

Borrowed Amount - The borrower can still borrow up 95% of the value of the property using CMHC insurance.

Example - What these changes generally mean is that it may be a little more difficult to qualify for  a CMHC insured mortgage as the debt ratio allowed is a little tighter, and the amortization is no longer as long which increases the monthly payment a little but decreases the total interest you would pay.  An example is if you have a $250,000 mortgage at 4% annual compounding, your payments would be about $1,194/month and you would pay $140,072 in interest over the 30 years if the rate stayed constant.  With the same mortgage amount and rate, but amortized over 25 years, you would pay $1,320/month and $118,602 in interest over the 25 years.

Refinancing Changes - The government has also decreased the maximum amount that someone can refinance borrowings against their home from 85% to 80%.  CMHC will insure refinancing at less than 80% LTV, but most Credit Unions and banks will lend for this type without using CMHC insurance.

Other changes for the future by OSFI

In addition to these changes that CMHC has put into effect, the Office of the Superintendent of Financial Institutions Canada (OSFI) that sets regulations for national banks (most provinces also follow similar rules) has released new rules that they expect banks to follow by the end of 2012.

A summary of the OSFI changes is below:

Home Equity Line of Credit (HELOC) - new HELOC offerings will be able to finance up to 65% of the Loan to Value (LTV) of a property, down from the existing 80%.  Another type of loan may be used to finance the difference of 15%. 

Loan To Value - The Loan to Value ratio should be recalculated upon any refinancing or whenever the lenders deems appropriate.

Down Payment - The 5% down payment should be from the borrowers' own savings.  Cash Back mortgage funds are no longer allowed to be used for the down payment.

Mortgage Qualifications - In order to qualify for a 1 through 4 year closed mortgage or a variable mortgage of any length a borrower must qualify at the Bank of Canada's 5 year posted rate.

If you have any questions about your mortgage or qualifying for a mortgage, contact a Consumer Lender here at Rocky Credit Union and you will get good advice that could help you as you purchase your home.  Jerry