How will the new mortgage rules impact home buyers and sellers?

 On January 17^th Finance Minister Jim Flaherty announced changes to government insured mortgages. These new laws are designed to support long-term stability in Canada’s housing market and support hard-working Canadian families saving through home ownership.

New Mortgage Laws

• Amortizations are reduced from 35 years to 30 years on insured mortgages above 80% LTV.  This could mean larger mortgage payments.  The idea is to have Canadians pay off their principal mortgage faster while reducing the total amount of interest paid.  This may be advantageous to a great deal of people, but those who are looking to refinance or purchase a home with a limited down-payment will find larger monthly mortgage payments.
• The amount a mortgage consumer can refinance is changed from 90% LTV to 85% LTV.  If you were to borrow money on an equity basis and your home is worth $100,000.00, the most you’d be eligible to refinance at is $85,000.00.
• HELOCs (Home Equity Line of Credit) are no longer backed by government insurance.  Loans that are secured by the equity in the consumers homes are no longer to be insured by the government.  This however will not come into effect until April 18, 2011.

How will reducing the amortization from 35 years to 30 years impact home buyers and home sellers?  While not all mortgages are written as a 35 year amortization, it is especially helpful for first time buyers or families starting out who desire the right house and want lower payments.

Lets look for example at a family or individual with a annual household income of $60,000 per year with a vehicle payment of $450 per month, credit card payments of 100 per month and property taxes on the new home purchase at an estimated $1500/year.  

Using 3.89% as a 5 year fixed rate this client would qualify for monthly payments of $1350/month.  The old rules allowed for a 35 year amortization and the client would be able to purchase a $310,000 home.  The new rules allow for only a 30 year amortization, and this client will now be able to purchase a $285,000 home, reducing the purchasing power of the client by 8%

These changes impact both buyers and sellers.  Buyers have had their purchasing power in this example reduced by 8% and the seller now has fewer people in the market that would qualify to purchase their home.

The new rule changes come into effect on March 18^th 2011 and given experience from the last mortgage rule change, many lenders will start changing their policies prior to this date.   

Mortgage Industry Regulation has Changed

 The Federal Government has changed regulations that affect the mortgage  industry.  On Monday 17 January, 2011 Finance Minister Jim Flaherty announced new rules that will:

 1.)    Reduce the amortization to 30 years from 35 years for government backed insured mortgages.  This amount was previously reduced from 40 years to 35 years in April 2010.

2.)    Ottawa will lower the maximum amount that Canadians can borrow when refinancing their mortgage to 85% from 90% of the value of their home.  15% equity in the home will be required for government backed insured mortgages.

3.)    Ottawa will withdraw government insurance backing on lines of credit secured by homes.

 These new rules do little to address the growing consumer balances of credit card debt or the loosely regulated auto finance industry.  Particularly troubling is the increased equity required for a home refinance.  While household financial prudence should be encouraged, this legislation may hurt many Canadian households.  To note would be the households who secured a mortgage within the last 4 years with a lender that is no longer in the business.  Lenders such as Xceed Mortgage Corp, Wells Fargo, N-Brook, Accredited Home Lenders, GMAC, GE Money and Household Finance to name a few.

 These households find themselves with an “orphaned” mortgage because their lender is no longer doing business in Canada and they are not being given a renewal option by the lender.  Under these new mortgage rules, this household now needs 15% equity in order to find a new mortgage lender.  Therefore the options available to them are; to put money down in order to refinance (and keep their home), sell the home or face foreclosure.  This portion of the mortgage market may notice the mortgage changes the greatest.

 Mr. Flaherty said at a new conference in Ottawa that the new measures will encourage Canadians to save more though home ownership and will reduce the exposure of Canadians to financial risks.

 If you have any questions about the information contained in the release, please do not hesitate to call Martin Krell – your Prince George Mortgage Broker at: 250-562-8622.