Looking for your first home? If you don’t have a large enough bank balance, you will probably need to look into getting a mortgage loan. But getting a mortgage is not as good an option as it used to be because the federal government has tightened the rules to prevent a potential housing bubble like the one that recently came about in the US. After the new rules came into effect, mortgages have become harder to qualify for and more expensive overall for new home buyers. Therefore, it is important to know the following Canadian mortgage rules before you look for your first home:
- Maximum amortization period: Amortization is the length of time (usually number of years) it takes to pay off a mortgage by making fixed monthly payments. Previously, the maximum amortization period allowed was 30 years for government insured mortgages. The new rules have reduced it to just 25 years and you must qualify for a 5 year rate with your financial institution. The government’s intention in taking this step is to discourage home buyers from stretching themselves and their budget too thin. By shortening the amortization period by five years, the government is also seeking to reduce the total amount of interest homeowners have to pay over the life of their mortgage.
- Mortgage insurance: For the purchase of a home with a new mortgage, a down payment of less than 20% requires government-backed mortgage insurance. Loan to Value Ratio (LTV): This is the amount of mortgage loan you will have access to when refinancing a home. Previously, the maximum LTV for refinancing was 85% of the value of the home. It has now been reduced to 80%. This means that if your home is worth $400,000, you will be eligible for a loan of up to $320,000. This reduction is designed to ensure that Canadians maintain more equity in their homes in the future. If you are planning to refinance your home after purchasing it, then you must keep this rule in mind.
These new mortgage rules are applicable only to government-insured homes with a price of less than $1 million and mortgages on residential properties with a maximum of four units. They also do not apply to the renewal of existing mortgages if the borrower doesn’t seek to add new funds to the mortgage.
It must be noted that the federal government has been tightening mortgage rules since the beginning of the global financial crisis in 2008.
- In 2008, the government reduced the maximum amortization period from 40 years to 35 years and also required home buyers to make a minimum down payment of 5%.
- In 2010, the government revised the rules to reduce the LTV ratio for refinancing from 95% to 90%.
- In 2011, the maximum amortization period was reduced to 30 years from 35 years and the LTV ratio was reduced to 85% from 90%.
- The new rules discussed above came into effect on July 9, 2012.
The implication of these rule changes for home buyers is that the government can make amendments to the Canadian mortgage rules again in the future. Therefore, you can expect that the rules will continue to become stricter in the coming years. If you are considering purchasing a new home, it pays to do your research and budgeting beforehand to make sure you can really afford a home. Check out our online mortgage calculator to determine how much interest you will pay on your mortgage over its amortization period.