New Mortgage Rules: Can You Afford It?

If you’ve been actively following any financial news related to real estate lately I’m sure you’ve heard of the new tightened rules for government backed mortgages in Canada.  If you haven’t, here are the basics- in an attempt to address the overheating housing market and increasing household debt concerns, Finance Minister Jim Flaherty made several announcements that may affect those who are looking for a home or currently own one and are nearing their refinancing date.  Effective July 9, the four measures regarding the new mortgages include:

1. 1. The maximum amortization period will be reduced from 30 years to 25 years
   2. The amount that homeowners can borrow when refinancing their mortgage will be reduced to 80% from 85%
   3. The availability of insured mortgages will be limited to homes with a purchase price of less than $1 million
   4. The government will set a fixed maximum for gross debt-service ratio at 39% and lower the maximum total debt-service ratio to 44% (from 45% previously)

So what does this mean to you?  At initial glance this new announcement is enough to set many people into a mini-panic. Based on a typical mortgage amount and posted mortgage rate, the reduction in the amortization period from 30 years to 25 would require the qualifying income needed to purchase a home to rise by approximately 6.7% or an increase in your monthly mortgage by about $136 a month.  It could mean that maybe you look at a duplex instead of a single family home, or a townhome instead of that duplex.  Or maybe you look to buy in a neighbourhood outside of the city- for example Fort Saskatchewan has excellent value for your money!

However this new 25-year amortization doesn’t have to be this giant evil that it may seem.  In fact, as mentioned earlier, one of the biggest reasons for this new change is to tackle the increasing household debt that is being taken on my many Canadians.  By lowering the amortization period, this pushes homeowners to truly evaluate their financial position and keep them from overextending and living beyond their means.  A shorter amortization period also means that over the life of your mortgage, you will have saved thousands of dollars on interest. Paying off your mortgage faster will also help you reach your other goals life sooner.

Below is an example of how much money in interests you could be saving with a shorter amortization period:

As you can see, $70,000 over the lifetime of your mortgage is a fairly significant amount of money that shouldn’t be taken lightly. That money can’t be used to spend on a really, really nice car, a $64,800 black crocodile Birkin bag (only women will understand…) or in my case full tuition including books and other expenses (unfortunately).

Keep in mind that the new rules will not apply to those who have already purchased a home and were approved for financing before June 22, however for those who were approved before July 9 but closing after December 31, they will.  Also, note that those with a pre-approval before July 9^th, but without a purchase agreement in place will also be subject to the new rules.  For more information, don’t hesitate to contact a mortgage expert to seek the advice on how these changes may affect you, or input your information into a mortgage calculator for a quick overview.