Federal changes to mortgage rules

 Canadian home buyers should be reassured by the government’s changes to the rules governing mortages and go forward with confidence when making a home purchase in 2009. If anything, things are looking more favourable this year for mortgage financing with the Bank of Canada rate now sitting at an historic low of 1.25 per cent. As a result, there will be significant pressure on financial institutions to pass on the reduction when setting their mortgage interest rates.

In the article immediately below, author Peter Vukanovich explains in a concise manner what the federal government’s changes to mortgage lending rules mean to Canadians.  

Understanding the new rules

Changes to Canada’s mortgage lending rules, news of turmoil in global financial markets and problems in the U.S. housing market have some Canadian home buyers wondering about their homeownership options. 

Fortunately, the news is good. Recent government changes to mortgage lending should have little impact on home buyer choices. 

The federal government implemented new mortgage criteria, which came into effect on October 15. They apply to individuals who purchase a home and obtain a mortgage with a down payment of less than 20 per cent from a federally regulated lender, such as a bank or credit union. 

There are two major changes. First, the time allowable to pay off a mortgage, called the maximum amortization period, has been reduced from 40 to 35 years. And home purchases now require a minimum down payment of five per cent. Home buyers can no longer borrow 100 per cent of the cost of their new home, as they could do prior to the change. 

The requirement for home buyers with a down payment of less than 20 per cent to purchase mortgage default insurance remains unaffected by the new rules. 

The new mortgage criteria will not make it more difficult for most home buyers to get a mortgage with an affordable monthly payment. For example, the majority of buyers who chose a 40-year mortgage also qualified for a shorter mortgage, whether 25, 30, or 35 years. Put in dollar terms, reducing a 40-year, $200,000 mortgage with a six percent interest rate to a 35-year mortgage at the same rate increases the monthly mortgage payments by only $41, but saves the homeowner $49,000 in interest payments  (Source: Department of Finance Canada).

Generally, most mortgage loans in Canada have five-year terms, after which the homeowner may choose a shorter amortization period or other payment terms that may be right for them at the time. 

Canadians regularly exercise their options to pay down their mortgage debt sooner. In fact, most Canadian homeowners repay their mortgage in 15 to 20 years, or in far less time than the amortization periods affected by the new criteria. 

While the changes won’t deny many people the chance to own a home, they will help ensure our housing market stays strong. 

Genworth Financial Canada’s Homeownership.ca website has tips and tools such as a rent vs. buy calculator, advice from third-party industry experts and information on mortgage options for prospective home buyers. For new immigrants to Canada, the site includes a specifically designed section that explains the home buying process in seven different languages. 

(Peter Vukanovich’s article originally appeared in the January 2009 issue of REM.)