It’s often difficult to be constantly up to date on all the various rule changes, but there were some important amendments effective 9 July 2012.
Both the Finance Minister, Jim Flaherty and the Governor of the Bank of Canada, Mark Carney have been concerned about rising consumer and household debt. Hence, the clampdown on the CMHC rules.
Canada Mortgage and Housing Corporation insures many Canadian first mortgages to banks. Effectively, if you qualify, you get a government backed co-signor for your loan. This, in turn, allows you to get a better rate with the banks. The insurance costs money, and the one-time premium is assessed at the outset, but added to the overall mortgage principal and repaid over time with your regular payments.
The new rules provide:
1) the maximum percentage of value which can be insured is 80% on a re-financing,
2) The maximum amortization period is 25 years,
3) The maximum value for a new home purchase is $1 million,
4) The gross debt ratio will be fixed at 39%,
5) The maximum debt ratio will be fixed at 44%.
The older provisions permitted 85% of the value of a home to be re-financed with a 30 year amortization, and without the upside limit on the value of the home.
The consequence, of course, will be that those who require secondary financing will need it a little sooner, and consequently will be faced paying higher rates.
Generally, this could have the effect of dampening the Canadian market somewhat, but the new rules were delayed until 9 July 2012 to lessen their market impact. This is traditionally a time when the real estate markets are slow.
The real test in terms of impact will be the Fall market.
It is important to note that high ratio mortgage financing from CMHC is still available to qualified consumers. So, you can still qualify for a 95% mortgage insured through CMHC. That program continues unaffected by the new rules.
Brian Madigan LL.B., Broker is an author and commentator on real estate matters.