Despite the recent economic conditions south of the border and the looming threat of the collapse of the Euro, the Canadian housing market has seemed bulletproof. According to a recent Globe and Mail article, house prices have doubled since 2002, experiencing an annual growth rate of 5 per cent above consumer inflation. Toronto, Calgary, and Vancouver have seen even greater growth. This has led many experts to believe that the Canadian housing market is due for a correction.
What's especially concerning is that Canadians have been taking on records amount of debt, on average 152 per cent more than income. As a result, on June 21, 2012 the government announced their plans to implement policy changes to curb the level of consumer borrowing, the fourth time in the last four years.
The new mortgage rules which kicked in on July 9th only apply to federally regulated lenders. Therefore, provincially regulated financial institutions such as credit unions are unaffected. Furthermore, these changes only pertain to high ratio borrowers with government insured mortgages (those with a Loan-to-Property Value of less than 20 per cent). The rules are summarized below with explanations of what it means for Canadian homeowners:
Maximum Amortization decreased from 30 years to 25 years
- So what? For some, housing has become less affordable because a reduced amortization means higher mortgage payments. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), 40 per cent of new mortgages last year had amortizations over 25 years. This change could therefore affect a significant number of home buyers. On the positive side, reduced amortization will mean that home buyers will be able to build equity more quickly and reduce the total interest paid over the life of their mortgage.
Maximum borrowing against the value of the property (i.e. refinance) decreased from 85 per cent to 80 per cent
- So what? This mean the government is pulling out of the mortgage refinancing market. Mortgage refinances are likely to drop for both renovations as well as debt consolidations. The goal of this change is to prevent homeowners from taking out too much equity in their homes. Given that homes prices have been rising so much over the last decade, this move will help prevent homeowners from taking out more equity than the future value of their homes (if the market experiences a price correction).
Maximum gross debt ratio (GDS) is capped at 39 per cent (total debt ratio is 44 per cent)
GDS and TDS (your total debt ratio) are commonly used to measure your ability to repay your mortgage. GDS is the share of the household income needed to pay for home-related expenses, such as mortgage payments, property taxes and heating expenses; and, TDS is the share needed to pay for home-related expenses and other debt obligations (like student loans, car loans, credit cards etc.).
- So what? Previously GDS did not apply to borrowers with a beacon score of 680+. This change will therefore only affect those applicants. A GDS limit of 35 per cent was already in place for applications with a beacon score below 680.
Government backed mortgages only available for properties less than $1 million
- So what? The reasoning here is that individuals purchasing homes valued at $1 million plus should be able to put at least 20 per cent down. However, given the high average home prices in Vancouver and Toronto, this new rule may not necessarily only affect the affluent population. On the positive side, this move will also allow the government to offer mortgage default insurance to those in greater need, i.e. first-time home buyers.
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