Canada’s new mortgage rules went into effect July 9th, 2012 but a recent survey by BMO (Bank of Montreal) suggests many people are unsure of what specific changes occurred. These changes will affect millions of Canadians, particularly those young buyers in the market for their first home. Despite the new changes, BMO claims many Canadians are out of the loop in terms of what these new measures could mean for the Canadian housing market.
The new Canadian Mortgage and Housing Corporation (CMHC) rules, as announced by Finance Minister Jim Flaherty, are designed to avoid a potential housing bubble, rumored to be threatening Toronto and Vancouver condo market. The major changes made to mortgage rules in Canada are:
- The maximum amortization period (the time it takes to repay the mortgage) dropped from 30 years to 25 years, which gives borrowers less time to pay back their mortgage.
- Lenders can only issue home equity loans of up to 80% of the property value, down from 85%.
- The mortgage default insurer will no longer insure houses worth more than one million. These new rules affect default-insured mortgages, or mortgages in which the buyer is required to make a downpayment of less than 20% of the purchase price (generally speaking), it seems that many border-line first-time buyers will be affected.
What are the implications of these changes? Since the amortization period is less, homeowners will have to increase their monthly payments to compensate for lost time. In other words, less time means more money paid each month. Nevertheless, the changes are designed to improve the housing market and help ease the overall burden of potential household debt.
The new mortgage rules, says Mr. Flaherty, can result in thousands of dollars in interest saved over the long term. Moreover, the shorter amortization period means new homeowners can start building home equity sooner, and start thinking about savings for retirement.
A survey conducted by Bank of Montreal states that 41% of prospective home buyers are more likely to spend less on a home than they would have prior to the changes. The changes particularly affect home-owners who may have previously been tempted by 85% refinancing. With the new changes, the limit is now 80%, which means the equity-cash out amount on a home will be less.
The new rules force prospective buyers to take a good, hard look at their financial situation prior to investing in a home. Potential first-time buyers should be financially stable enough that they can afford changes in monthly payment. If a first time buyer, can afford a monthly payment of $2004, but not an increased payment of $2184, perhaps they are too sensitive to price increases and they should not be purchasing a new home until they are more financially stable.
TD Bank believes that these changes will result in a drop in average housing prices of almost 15%, and cool off the Canadian housing market in general. The Canadian government can’t stop people from overspending, but they can prevent some prospective buyers from waiting to buy.
About The Author:
Meghan Tooley is an author, active blogger and commerce student from Winnipeg. To learn more about variable and fixed rate mortgages visit Integrity Mortgage Service today.