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Canadian Mortgage Rules: Why Changes Were Required

April04
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The Canadian mortgage and housing market has changed a lot over the past couple of years. It is experiencing slower growth and more stringent rules and regulations. The Canadian mortgage rules had been revised in order to control the high growth levels. This was necessary because with high growth comes higher risk. This became quite obvious when the economic down turn had its impact on the sector.

 The new mortgage rules in Canada were first introduced in 2010 by the government. These rules have been incorporated into the sector by now. Surprisingly the Canadian mortgage trends have been showing signs of growing stability since then. It was being predicted that the growth in the Canadian mortgage and housing market will have a huge impact felt with the new rules.

But the assumptions and predictions have been proved wrong. The Canadian mortgage rules though strict have been designed to protect the interests of not just the borrowers but also the lenders. The Canadian Mortgage and Housing Corporation have the responsibility of ensuring the proper implementation. The CMHC is also responsible to make sure that high growth does not bring high risk in the future.

The Need

The new mortgage rules in Canada were quite justified too. There were many factors that were being highlighted by economists that required immediate attention. These factors were threatening to destabilize the economic structure of the country. The overall economic down turn did cause some problems but because of timely action taken by the government, the situation was handled with minimal damage.

Apart from the many roles and responsibilities that the Canadian Mortgage and Housing Corporation perform on behalf of the government, it overlooks the mortgage qualification process too. The CMHC mortgage insurance policies and guidelines were revised in particular by the new mortgage rules in Canada.

One of the major reasons for the revision in Canadian mortgage rules was the insurance factor. The Canadian mortgage rules had been showing that people had been taking up mortgages which they could not afford. These mortgage loans were usually the high-ratio mortgages where there was a smaller down payment and a bigger loan or mortgage amount borrowed. These are risky mortgages and require insurance by the CMHC.

Because they are very risky ventures they had become more of a threat than other factors. There was fear that if in case defaults start to occur, the whole economic structure would get affected. The CMHC being the primary insurer of mortgage loans tries to protect the lenders and the borrowers against default. But if they start occurring at a massive scale the impact in the end would be on the government. This is why it was being discussed in the first place to change the policies for insurance as it creates economic pressure.

The government therefore, not only had to consider the security of the lenders and borrowers in this scenario. They also had to focus on securing the Canadian Mortgage and Housing Corporation. The corporation itself conducts market researches and surveys for the government. They had already identified the possibility of an economic down turn. The global recession was threatening to hit Canada and the government had to react.

The demographic changes had been causing trouble as well. The exponential rise in demand was a major factor that had to be considered. All the people coming into the country had to be accounted for. Housing projects were being overlooked by the CMHC at a massive scale. In this scenario most of the house buyers were taking advantage of the low mortgage rates and were taking up mortgage loans. This was a huge contributor towards the Canadian mortgage rules in general.

There were other demographic factors too. But the immigrants were a huge problem that needed to be solved fast. The Canadian mortgage and housing sector demanded a lot of effort and attention. The government and the CMHC are still trying to curtail the impacts of the demographic changes as much as possible. But the rate at which immigrants had been coming in and buying houses especially on mortgage had been getting out of hand. With the new mortgage rules in Canada some level of normality in growth has been achieved.

The Rules

In 2010 the first changes to the Canadian mortgage rules were announced by the government. It was also announced that the Canadian Mortgage and Housing Corporation would now be stricter regarding the mortgagee qualification criteria.

These rules were a result of the need that was felt to revise certain policies for the protection of the CMHC. The major changes that were made were:

The borrowers would have to meet the requirements for a five-year-fixed mortgage. This would mean that these are the bench mark requirements and will remain standard for any type of mortgage loan. Even those people applying for short term mortgages or variable mortgages will have to fall into these criteria in order to be able to qualify.

The next basic measure taken was to increase the minimum down payment requirement. This was raised to 20% of the purchase price. If in case the down payment is lower than this level, it would have to be insured.

The maximum amount allowed to be borrowed for refinancing was lowered. It had been 95% earlier and was reduced to 90% based on the Canadian mortgage trends. There were a few more changes made in 2011 to the rules and regulations.

It was announced that the maximum amount that can be borrowed for refinancing had been reduced further. The 90% allowance was brought down to 85% according to this announcement.

These new Canadian mortgage rules also announced that the maximum amortization period would also be reduced. This was particularly for the government insured mortgages. The maximum amortization period was previously as long as 35 years but was brought down to 30 years. The government would also hold back from insuring lines of credit that were secured by homes. This way the risk would be borne by the lenders and the borrowers and will not affect the government.

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