New Mortgage Rules effective July 9, 2012
Finance Minister Jim Flaherty recently announced new mortgage financing rules due to take effect by July 9, 2012. Here are the highlights:
- The maximum amortization period for a government-insured mortgage will drop to 25 years from 30 years. Typically government insured mortgages occur where the amount of down payment is less than 20 percent
- Mortgage payments will be limited to 39 percent of gross personal income, and an applicant’s total debt-service ratio will be capped at 44 percent
- Home equity loans will be capped at 80 per cent, down from the current 85 per cent
- Homes with a value exceeding $1 million will not be eligible for government insured mortgages
This is the third time in recent years the federal government has tightened mortgage lending rules. In 2008, Ottawa cut the maximum amortization period to 35 years from 40 years and required a minimum down payment of five percent. In 2011, it reduced the maximum amortization period again to 30 years.
What impact could these changes have on potential home buyers?
Two of these actions 1) reducing the maximum amortization period and 2)reducing the gross service ratio (GDS) will reduce how large a mortgage a home buyer will be eligible for. On the positive side, reducing amortization periods will allow home owners to build up equity in their homes more quickly and reduce the total interest cost over the life of the mortgage.
What effect is this likely to have on the real estate market in Durham Region?
On the whole, these new rules will probably not have a big impact on the Durham Region real estate market. With the average home price in Durham Region at slightly higher than $330,000, the number of home buyers requiring a 30 year amortization to manage their mortgage payments is relatively small. However, first time buyers may have to scale back their expectations. On the other side of the coin, one possible benefit may be that more people from the Toronto area may decide to purchase in the more affordable suburbs.
Home buyers looking to avoid the new rules will need to secure pre-approval from a lender for a 30-year amortization and sign an agreement to purchase a home before the July 9 deadline