New mortgage guidelines are coming… and they’ll be in effect quicker than you think. Just last week Finance Minister Jim Flaherty caught the mortgage industry off guard when he announced 4 new measures that tighten the guidelines for mortgage financing – with an effective date of July 9, 2012. While the rules are meant to cool the market – it may just put home ownership out of reach for many prospective buyers.
The new guidelines are put in place to “ensure that we have strong first-time buyers who are building equity in their properties” says Flaherty. But the changes affect more than just first-time home buyers.
Current mortgage guidelines allow existing home owners to refinance their properties to 85% of their value to consolidate debt or access equity. When the new changes take place, that will be reduced to 80% – forcing Canadians to look for higher interest loans or private financing to make up the difference. The bad news doesn’t end there. Not only is your equity locked up in your property, but the maximum amortization, or length of time, to pay down your mortgage has also been reduced. Currently home owners have access for amortizations up to 30 years (35 years on conventional mortgages)… but not for long. Starting July 9th the maximum amortiation will be reduced to 25 years. On a mortgage of $250,000 (with a rate of 3.09%) this makes a difference of an increase of about $132 per month.
The new guidelines stretch much further than first time home buyers. Homeowners and purchasers looking at investing in real estate with a price tag that exceeds $1 million are going to have to come up with a significantly larger down payment. Currently these properties can be purchased with as little as 5% down… the new guidelines state that a 20% down payment will now become the new minimum. That’s a 15% increase! I think we’ll be seeing a lot of these properties sitting on the market.
The forth and final change affects every Canadian. Going forward your maximum TDS (total debt servicing ratio) – ie: the percentage of income you spend to cover all of your debts – will be reduced from 44% to 39%. This 5% decrease will drastically affect anyone who is carrying consumer debts.
While these changes were made at the federal level, OSFI (Office of the Superintendent of Financial Institutions) has some proposed changes of it’s own. The final word hasn’t come down yet but changes are likely to be made to lines of credit and renewal processes. Keep an eye out for updates.