The big news this week is the upcoming mortgage changes that will be coming next Monday. Many lenders have been announcing their policy changes this week and many of those are now operating under the new rules. Which is really unfortunate for last minute buyers that need the extra 5 years in order to qualify for their first purchase.
To summarize, here is the list of changes to CMHC insured mortgages that the government announced last month:
- The maximum amortization period would be reduced to 25 years from 30 years.
- For refinancing, the maximum amount of equity a homeowner could take out has been adjusted to 80 percent from 85 percent.
- High ratio, or mortgages with less than 20% down, which are government backed will only be available to homes with a purchase price of less than $1 million dollars.
- Finally, the maximum gross debt service ratio will be 39% and the maximum total debt service ratio at 44 percent.
Certainly, the reduced amortization will have the biggest impact to the housing market as many first-time buyers in the major metropolitan areas need the extended amortization in order to afford their first, big real estate purchase.
The reduced loan-to-value for refinances helps to eliminate the ATM effect that these historically low rates have created. It makes it that much harder to refinance those higher rate debts onto your mortgage which could have improved cash flow and reduced the amount of interest that was being charged. One could think that the purpose of this change would be to change people’s thinking BEFORE making large, big-ticket items without real need. But, isn’t that kind of thinking counter-productive to the soft-landing that the government is trying to engineer?
Requiring 20% down for higher-end homes is really more about optics as very few purchases in the market would fall into this need. In all my years in mortgages, I can only think of one deal, done recently, where this would have come into play. I don’t expect to see much fallout as a result of this change.
Lastly, the reduced debt servicing ratios are really more common sense. Under the old rules, where the gross debt servicing ratio (GDS) and total debt servicing ratio (TDS) could be 44% if the borrower had a credit score over 680, it left no room for additional debt servicing. Meaning, if a city dweller decided that they wanted to buy a car and required some kind of financing, the payments would then put a huge cramp in their lifestyle, making things potentially unaffordable. For this reason, I think this is a positive change as it helps to protect borrowers from themselves.
Looking back, most of these changes really put us closer to where we were a few years ago before policies started to relax and the US meltdown happened. We’re back to 25 year mortgages, and the debt servicing is still more lenient than it was back in the days when we used 32% and 40% for GDS and TDS, respectively. We were able to buy homes then, and we’ll still be able to buy home now. Perhaps a little less house, but people will still be able to buy.
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Lee Welbanks is a Mortgage Broker with Welbanks Financial Group, Lee will be posting these informative “Market Minutes” each week for you to enjoy. Please remember to the Spring Realty Insider Club list to receive new blog post notifications, featured properties and insider access to Toronto’s hottest new developments right to your inbox. Find us on Facebook and Twitter too!