Federal Government Changes to Mortgage Lending - June 21, 2012
For the fourth time in the past four years, the Federal Government has announced further action to restrict mortgage credit. The new measures include:
- The maximum amortization on a prime mortgage will be reduced from 30 to 25 years.
- Mortgage insurance will not be provided for properties valued over $1 million.
- Refinancing has been lowered from a maximum of 85% loan-to-value to a maximum of 80% loan-to-value.
- The maximum gross debt service (GDS) and total debt service (TDS) will be limited to a maximum of 39% and 44% respectively. Currently, GDS does not apply to qualified borrowers with credit scores over 680.
These measures will take effect July 9, 2012.
Implications for the BC home market:
- The new 25 year amortization will have a small but material impact on affordability for homebuyers. For a $300,000 mortgage, the shorter amortization period will add over $150 per month to mortgage carrying costs for homebuyers that would have instead opted for a 30 year amortization. This is equivalent to an approximately 1 per cent increase in mortgage rates.
- Longer amortization period may also impact the rental market where investors have utilized longer amortization period to lower carrying costs.
- Prohibiting mortgage insurance for properties over $1 million will impact Vancouver markets to a much greater extent than other Canadian jurisdictions. While this policy may have limited impact on credit access for high-ratio borrowers, it will tighten credit for the $1 million and over segment of the market through its impact on lenders risk management practices. This is particularly true in light of the CMHC already rationing portfolio insurance for low-ratio mortgages.
Q. I have a written mortgage pre-approval from a lender, dated before July 9, 2012 with a 30-year amortization. Will I still be eligible for a 30-year amortization if I don’t sign an agreement of purchase and sale until July 9, 2012 or later?
A. No, a mortgage pre-approval without an agreement of purchase and sale is not sufficient to qualify for a 30-year amortization. You may have a 30-year amortization only if your agreement of purchase and sale is dated before July 9, 2012 and you have made a mortgage insurance application before July 9, 2012. You may wish to discuss with your lender to revise your mortgage pre-approval using the new parameters announced today.
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