Federal Finance Minister Jim Flaherty announced yesterday tighter mortgage rules to address concerns over high Canadian household debt and to ensure the stability of the Canadian Housing Market.
Currently the ratio of household debt to disposable income has reached 147%.
The three main changes are:
1) Buyers who purchase with less than 20% down payment and therefore require a CMHC insured mortgage will be allowed a maximum amortization of 30 years (down from 35 years).
2) The most Canadians can borrow against their home’s equity will be 85% (down from 90%).
3) There will be no further government backing (through insured mortgages) on home equity lines of credit.
The change in amortization and refinance borrowing limits will go into effect on March 18, 2011 and the change in insurance on home equity lines of credit will go into effect on April 18, 2011.
Fortunately for new home buyers the minimum down payment remains at 5%, and the requirement that just 50 percent of monthly condo fees (if applicable) will be used in debt ratio calculations will remain unchanged.
This is the second time in three years that the government has changed mortgage rules.
In 2009, the government brought in changes that included:
1) Cutting the maximum amortization period to 35 years from 40.
2) Requiring a minimum down payment of five per cent.
3) Establishing a requirement for a consistent minimum credit score.
4) Introducing new loan-documentation standards.