Mortgage Rule Changes March 18

Canadians Keeping More Equity

The Canadian federal government announced in January that they would be changing some of the rules regarding Canadian mortgages in an effort to help Canadians reduce their household debt load and encourage building and maintaining equity in their homes (http://www.fin.gc.ca/n11/11-003-eng.asp). Starting March 18th the first change is that the maximum amortization period for high-ratio loans is being lowered from 35 years to 30 years. High-ratio loans are those where the loan-to-value ratio is calculated at 80% or higher. Loan-to-value ratio is calculated by subtracting the down payment amount from the selling price of a property, and that remaining value – the loan amount – is divided by the total selling price.

For example; a home in Surrey sells at $565,000.00 and the Buyer has a 10% down payment of $56,500.00. The remaining loan amount is $508,000.00. Dividing $508,500 by $565,000 (the total selling price of the house, or the value) the loan-to-value amount or percentage is 90%, which would certainly mean a high-ratio loan, and the maximum term for that loan is 30 years.

The second change affects homeowners who are looking to refinance their mortgages, reducing the maximum value that they can borrow from 90% to 85% of the value of their home. This means that on the same $565,000.00 home in Surrey, the homeowner can access $480.250 of the home’s value as opposed to the $508,500 that was accessible prior to this rule change. What this does is it keeps another $28,250 in equity in the home rather than allowing the homeowner to take it out in financing, ensuring that the homeowner has a greater value in the home as an asset.

The third change announced by the federal government is that the government is no longer guaranteeing non-amortizing lines of credit where the home is used as security (i.e. home equity loans or home equity lines of credit). That is, home equity loans or lines of credit that do not require a monthly payment on the principal and interest will no longer be eligible for government-backed insurance. This does not mean that they are entirely ineligible for insurance, just that the federal government will not be insuring these types of loans or lines of credit without scheduled principal and interest payments. This change will go into effect on April 18, 2011.

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