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.

Which Mortgage Is Best?

There are a variety of mortgages, and each one has its advantages and disadvantages.

A fixed rate, closed mortgage - about 75% of mortgages across Canada are fixed rate, closed mortgages.  Typically someone locks in their rate and payment for 5 years.  This lets consumers know what their payment will be every month and how much will be left on the mortgage at the end of the 5 year term.

A variable, closed mortgage - this mortgage has a rate that floats with a financial institution's prime lending rate and is often for a 5 year term.  Usually the payment is set at the current rate and then the actual interest rate goes up and down throughout the mortgage.  The advantages are that this rate is usually lower than a fixed rate and that if the rate decreases your payment is paying more towards the mortgage principal.  However, the disadvantage is that if the rate goes up you will pay more in interest and it is possible that very little of the principal is paid down by the end of the term.

Rent Vs Mortgage

Over the past 20 years Canadians have decided that owning a home is a great financial investment.  While owning a home has many advantages, there are also many reasons you may not want to own a home.  The following is a short list of some of the main reasons for and against owning a home:

Pros -

• Sense of ownership
• Build equity in an asset rather than paying it all to someone else
• A house usually grows in value at, or above, the inflation rate
• Privacy
• Freedom to do what you want with the house for decorating and renovations
• Financial security for retirement

Costs of a Home

A couple of weeks ago I spoke with a 23 year old, single young man who has been living with his parents for the past 18 months.  He was talking about saving up money for a down payment on a home.  He already has a pretty good idea about what mortgage payment he can afford.  He is buying a small house, with the hope of moving into a larger one in several years.

I threw him for a loop, though, when I asked him about property taxes and maintenance costs.  He had not thought about those costs.  He figured property taxes would be about $400, but when I told him to expect property taxes to be around $2,000 or more his jaw almost hit the floor.  He had no idea the taxes would be that high. 

There are always added costs to owning a home.  Here are a few I could think of:
Property Taxes - these always seem to be more than you thought, and they tend to increase pretty much every year, sometimes by several percent.  It often means having to put away $150 to $300 away each month to pay for them, a cost that can really add up.