In an effort to reign in household debt, the Federal government has yet again decided to tweak existing mortgage rules. If you’re thinking about buying a new home, refinancing an existing property or taking out a home equity line of credit (HELOC), these rules will affect you.
To help you make sense of them, below are the three changes in a little more detail:
1. The maximum amortization on high-ratio mortgages (less than 20% down) is now 30 years.
There was a time when Canadians could spread their mortgage out across 40 years – rather than the traditional 25 – thus lowering their monthly payments dramatically. That maximum number was changed to 35 years in 2008, and has since been lowered again to 30 years with the recent changes.
This means that the longest you can take to pay off your mortgage in Canada today is 30 years. This will primarily affect individuals who are trying to get a foot in the market, and are having difficulty affording the higher monthly payments, as well as owners of rental properties.
2. Homeowners can now refinance a maximum of 85% of their home’s value, down from 90%.
If you’re looking to refinance your mortgage – either in favour of a better rate, or to roll higher interest debt into your lower interest mortgage loan – you were previously able to acquire a new loan that was as high as 90% of your home’s value. Under the new changes, that number has been lowered to 85%.
If you are simply switching to a mortgage with a better rate – and you already have more than 15% equity built up in your home – this will not affect you. If you are looking to roll high interest debt into your mortgage, and that debt brings your total mortgage to more than 85% of your home’s value, you’ll now have to find another way of tackling it.
3. The government will no longer insure Home Equity Lines of Credit (HELOCs).
If you take out a mortgage with less than a 20% down payment, the lender will require you to purchase mortgage default insurance that is designed to protect the lender in case you default on your loan. While there are private default insurers out there, the government – through the Canada Mortgage and Housing Corporation (CMHC) – also offers this product.
Similarly, when you take out a home equity line of credit – a revolving loan that is secured by your home’s equity – the government offers the same insurance to protect the lender in case you default on the loan.
Under the new rules, the government is no longer offering insurance for HELOCs – which means private insurers will also likely follow suit. This means that lenders will have to carry this risk on their own, with no protection. This will make it more difficult – and possibly more expensive – to acquire these products in the future.