New mortgage rules announced by Federal Finance Minister Jim Flaherty apply to all government backed mortgages effective April 19, 2010.
What is a government backed mortgage? Any mortgage where the down payment is less than 20% of the value of the home is considered a high ratio mortgage and requires insurance through either CMHC (Canada Mortgage and Housing Corporation) or some other mortgage insurance institution. This type of insurance provides security for the lending institution whereby the insurance will pay the outstanding balance of the mortgage if the homeowner defaults on the mortgage payments.
Here is a quick look at the changes:
Borrowers must now qualify based on the five-year fixed posted rate even if they choose a mortgage with a lower interest rate and shorter term.
For those people who have been pre-qualified for a mortgage but have not purchased a home prior to April, it would be prudent to have your pre-qualification done again. Anyone who has a firm transaction that will close after April 19th, is probably okay, but it wouldn’t hurt to contact your financial institution to confirm that they will not require you to re-qualify.
The maximum amount Canadians can withdraw in refinancing their mortgages will be reduced to 90 per cent of the value of their homes, instead of 95 per cent.
Minister’s Flaherty’s comments regarding this change were that Canadians had to stop treating their homes as an ATM! There is a concern that Canadians are carrying too large a debt load and the ability to refinance your principle residence is contributing to that debt load. This change is the government’s way of forcing all of us to be more financially responsible.
A minimum down payment of 20 per cent will be needed for government-backed mortgage insurance on non-owner-occupied properties"purchased for speculation," which realistically means rental properties.
For further information regarding mortgages, please contact your mortgage broker or financial institution.