Major CMHC Rule Changes: Implication to Home Buyers
Down the history, Canada’s mortgage rules have been changing about once in every two years. However, the major changes effected on July 09, 2012 have impacted real estate sales in a significant way compared to the past. Gone are the days when home buyers could get amortization for 40 long years. Canadians could get 100% financing on all new purchases and could refinance up to 95% LTV. A mortgage broker could even help you get a mortgage when you neither had an income nor a job.
The new rules by the Canadian Government mandate that the home buyers obtain mortgage insurance from CMHC when the down payment made is less than 20% of the mortgage.
Important Changes in the 2013 CMHC Rules
The important changes to the mortgage rules consist of the following. The maximum amortization period has now come down to 25 years from 30 years. The reduction in the amortization period will mean an approximate 9% per annum increase in the monthly carrying costs. However, the overall interest paid over the mortgage will come down. The maximum loan amount a borrower can get while refinancing has been reduced to 80% of the value of the home. The government has now placed limit on the gross debt and total debt ratios used by money lenders during the mortgage approval process to assess a borrower’s ability to pay.
Following the revision, now the maximum for gross debt service ratio GDS is 39%. While the maximum for Total Debt servicing TDS is 44%. Lastly, while mortgage insurance can be purchased only for homes with a purchase price of less than $1 million, the borrower must arrange to make a down payment of at least 20% for homes priced more than $1 million.
Rules for Self-Employed Borrowers
All self-employed borrowers will have to produce a reasonable income verification including NOA or T1 general in addition to submitting evidence of reasonable ability to service debt including cash reserves, investments or equity in biz. Cash back offers are no more a part of the down payments. On the whole, the affordability equation for Canadian home buyers appears to have become tougher with the said revisions.
Consequences of Changes in CMHC Rules
The implications of the mortgage rule changes to the home buyers need to be discussed. The reduction in the amortization period to 25 years renders mortgage payments a little more expensive for you as a home buyer. However, you need to note that the new arrangement will drive more of the mortgage payment towards the principal amount thereby saving you a significant amount over the interest paid in the long run.
The reduction in the refinancing amount to 80% will mean existing home owners looking to tap into their home equity can borrow only a slightly lesser amount. However, this rule also has a favourable aspect of saving for the home buyers since earlier any amount borrowed more than 80% of equity available would invite a CMHC fee. Changes to qualifying ratios need not be a big issue since the past history reveals that these ratios were even more restrictive. However, this has brought down the percentage of people who could qualify.
No more CMHC for homes selling over $1,000,000 could be perhaps one of the biggest hindrances to the market. However, one visible effect is that due to the drop in the ability of homebuyers to get financing for the homes falling in this price range, the values of such homes have dropped. Such a trend is noted predominantly in the more expensive markets like Vancouver and Toronto.
The Right Broker Still Carries High Importance
Whether the changes are favourable or not favourable to homebuyers is a question that depends on the specific situations of each home buyer. In most cases, home buyers feel things are fine if a money lender just approves the mortgage. CMHC rules getting a bit tougher will see to that home buyers do a better planning so that the mortgage also becomes more secure and manageable. So, the right broker still carries high importance in buying a home.
Contact us at 1-866-963-CMGC (2642) for the perfect advice on home mortgages.