The second half of this year has been big for Canadian mortgage news. In July, the Canadian Mortgage and Housing Corporation (CMHC) amended its guidelines and mortgage amortization rules in an effort to try and decrease the debts of current and future homeowners in Canada. These guideline changes have had some significant impacts, particularly for those individuals seeking mortgages of over 80% financing.
The most significant change is with regards to the mortgage amortization period. Any mortgage contract prior to July 9th provided the option to choose a 30 year amortization period. After July 9th though, this mortgage amortization period has changed from 30 to 25 years. This will, on average, increase monthly mortgage payments by about 12%.There are some pros and cons depending on your current financial situation that accompany these mortgage amortization period changes, especially for first time home buyers. Firstly, these changes make it a bit tougher to get approved for a mortgage. Since one of the goals of these changes overall is to ensure that the individual seeking the mortgage is better prepared for home ownership, a shorter mortgage amortization period may affect your approval. When a lender assesses an individual’s ability to financially manage a mortgage, they usually calculate the maximum amount that is financially manageable. Since a shorter mortgage amortization period increases the monthly mortgage payment, this may negatively impact your ability to receive approval for a mortgage.
At the same time, if a small increase puts you over the threshold of affordability, perhaps it is time to rethink the amount that is being sought.On the flipside, the positive aspects relate to the decreased interest that you will pay thanks to a shorter mortgage amortization period. Knocking 5 years off of your mortgage term can save you significant interest in the long run, and leave you mortgage free 5 years sooner.
Another result of the CMHC guideline changes impact mortgage refinancing. Mortgage refinancing, originally maxed at 85% of the value of the home, has been reduced to 80%. This change, like the altered mortgage amortization period, is meant to promote saving through home equity and to decrease the debt load for current homeowners.Since these changes are due largely in part to the high amount of debt being carried by average Canadians, it is no surprise that yet another change to CMHC guidelines is in respect to individual gross debt service ratio. Gross debt service ratio, which refers to all of your property-related costs (mortgage payments, property taxes, heating, condo fees, etc.), must not exceed 39% of your total income. This has been decreased from 44%.
Another CMHC change aside from a shortened mortgage amortization period, lower mortgage refinancing, and a lower gross debt service ratio, includes the banning of government-backed mortgage insurance on those properties costing over $1 million – although this is less of an impact for most of the population that the other changes.
For more Canadian mortgage news or to find out more about CMHC guideline changes including a shorted mortgage amortization period, please contact Paul Mangion of The Mortgage Centre at 416-204-0156 or visit www.themortgagecentretoronto.com