New Mortgage Rules Breakdown

Today Canada’s finance minister Jim Flaherty announced new mortgage rules. There has been a lot of confusion regarding what this means for everyday people, especially new home buyers.

Here is the main breakdown:

Concern over rising debt in the average Canadian household prompted these changes. It consists ofthree things:

• A reduction in the maximum amortization period from 35 years to 30 years. This means when applying for a mortgage a buyer can run that mortgage out for a MAXIMUM of a 30 year period instead of the old maximum of 35 years. The result of this means payments will be higher only for individuals who would have used the full 35 year period.

• When re-financing your home, you are now only allowed to borrow 85% of the homes value. This is down from 90% previously.

• Ottawa will WITHDRAWAL government insurance backing on lines of credit secured by homes

The average Canadian resale home sold for $344,551 in December. Assuming a five-year mortgage at 4 per cent interest, and the minimum 5 per cent down payment of $17,227, a 35-year mortgage would have monthly payments of $1,441. Shorten the amortization period to 30 years, and the monthly payment increases to $1,555.

These rules are meant to allow Canadians to save more of their money instead of paying more interest over the long run. It is also meant to reduce the overall debt of Canadians which has been steadily rising.

All of these changes will be implemented  60 days from today. If you still would like a 35 year amortization period, you have until then to secure one.

HOW THIS AFFECTS YOU:

1. If you are new time buyer and want to purchase a home, the maximum amortization period you have to choose from is now 30 years. It essentially means your payments will be higher, however more of that money will go towards the price of your home instead of interest to the bank.
2. If you currently own a property and wish to re-finance it, the maximum amount of money you will get is 85% of the value of that property. This is a 5% drop from current rules.  So if your home is worth $400,000 the MAX amount of money you can receive is $340,000 (or 85% of $400,000)

FICTION: All first time buyers will have to put 15% down on new homes.(This is not true at all. The 85% rule only applies to people re-financing their current home and does not affect first time buyers whatsoever).