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Canadian Mortgage Changes

If you look at any recent housing market survey, you’ll notice a common trend. The Canadian real estate market is cooling, but definitely not popping. In spite of this, the Government of Canada has announced more changes to government-backed insured mortgages in the hopes of limiting the amount of household debt Canadians have and to cool the housing market further. Four changes were announced yesterday and they are as follows:

Reduce the maximum amortization period to 25 years from 30 years
By reducing the amortization period, people will face higher monthly payments, but are expected to be debt free faster. The amortization period has been reduced twice before. In 2008, it was 35 years and was reduced again to 30 in 2011. An example of how this will affect Canadians was given by IMBA president, Albert Collu when speaking with MortgageBrokerNews.ca. “Reducing an amortization for a $300,000 mortgage at 3.29% from 30 years to 25 years is a difference of approximately $156,” said Collu.

Lower the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent of the value of their homes.
This move is trying to encourage homeowners to manage borrowings against their homes. With historically low interest rates, the fear is that homeowners are increasing their household debt, which has reached the highest it’s ever been. For most homeowners, this change will not make a lot of difference.

Fix the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent.
The two ratios mentioned are to determine affordability by CMHC. The gross debt service ratio looks at a person’s monthly housing costs in comparison to their gross monthly income. It’s recommended that your gross debt service ratio should not exceed 32%, and is now capped at 39%. The total debt service ratio looks at a person’s entire monthly debt load compared to their gross monthly income. This ratio includes housing costs and all other debt payments like car loans and credit card payments. According to CMHC, this should not exceed 40%, and is now capped at 44%. This will better protect Canadian households that may be vulnerable to economic shocks or an increase in interest rates.

Limit the availability of government-backed insured mortgages to homes with a purchase price of less than $1 million.
This new cap should not affect many families or first-time homebuyers for which the Government-backed mortgage insurance was originally created. Based on MLS data CMHC forecasted the national average resale price of a home to be $372,700 in 2012 and $383,600 in 2013. If you live in either Vancouver or Toronto, the average price might be double the national average, but still does not exceed the $1 million cap being put in place. Borrowers purchasing $1 million homes will be required to pay a down payment of 20% or more.

I thought you may find this information useful in order to better understand the intentions of the Government and the reason why the changes occurred. In Canada, the last two economic recessions recovered due to Canadian exports. This time it is different! The recent economic recession recovered with the domestic housing market. That said, given the slowdown in China along with a European recession currently underway, the last outcome the Canadian Government wants to see is a housing correction and as a result has implemented further tightening. The housing market is keeping the domestic economy in place and any shock could have severe consequences in the years to come. If you have any questions please do not hesitate to contact me.

 

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