The Globe and Mail reported this morning that Finance Minister Jim Flaherty announced new mortgage rules.
Most high ratio mortgages (mortgages that are more than 75% the value of the home) are high ration insured by the Canadian Mortgage and Housing Corporation (CMHC) and their lending guidelines (which are dictated by the Ministry of Finance) largely determine how much money you will be able to borrow against your home.
While these new rules are responsible and in the best interest of Canadians, they will impact homeowners because the Canadian Government is further tightening the amount of equity you will be able to take out of your home (with CMHC insurance).
Here are some of the highlights of the new federals rules that were announced. The new rules will:
1. Reduce the maximum amortization period to 30 years from 35 years for CMHC (government) insured mortgages where the loan to value exceeds 80 per cent.
2. Reduce the amount Canadians can borrow when refinancing their mortgages from 90% loan to value to 85% loan to value.
3. Begin the process of withdrawing CMHC insurance on lines of credit that are secured by home equity.
These rules are scheduled to take effect in March of 2011. So, what does this mean to you?
1. If you are currently living your lifestyle around having a mortgage payment that is based on an amortization of more than 30 years, it is time to start thinking about how you can eliminate other debt and payments. Your bank may want to reduce your mortgage amortization when your mortgage term is due and you are trying to renew your mortgage and this will directly impact your payment (making it higher). Also traditionally mortgage amortizations have been based on 25 years and it seems that CMHC may be headed back into that direction. So while now it is being reduced to 30 years, in the future it may be further reduced to 25 years.
2. If you have been thinking about refinancing your home to consolidate debt, you had better call your mortgage broker a.s.a.p. Now that this announcement was made, the banks will quickly start to adjust their rules to comply. This will happen likely before the rules do, so if you need to take more than 85% of the equity out of your home – the window of time is closing fast.
3. If you planned on obtaining a home equity line of credit for a home renovation or some other reason, this may be more difficult now. Without CMHC insurance, the banks will be less likely to issue high ratio lines of credit based on home equity. Some banks may also reduce the limit on your existing line of credit in the event that the insurance is withdrawn. Your mortgage broker can tell you what other financial products are available. A second mortgage is a viable option as you often do not CMHC insurance to get one.
This is a positive step on the part of the Canadian Government because while it further restricts the amount that you can borrow against your home, it prevents you from leveraging all of your home equity. A healthy mortgage amortization is 25 years or less and the idea of paying off your mortgage over more than 30 years is not a financially responsible one.
As the Canadian government continues to move in a more conservative direction with respect to lending principles we must follow suit with respect to our borrowing and spending habits. We can do this by taking a hard look at our household debt, find ways to pay it down and improve our overall financial goals. For more information please visit www.gtamortgagematters.com
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