Changes in Canada Mortgage Rules - What Should You Expect Now?
Although the new changes in Canada mortgage rules were implemented in July last year, the effects are starting to get visible only just now. The rising number of foreclosures led to the implementation of the new mortgage rules in the first place, and the stricter policies now make it more feasible for home owners to lock into a mortgage that is actually affordable for them.
Previously, a lot of people jumped into the low mortgage rate bandwagon without thinking and this increased the burden of debt to a large degree amongst Canadian homeowners. Lack of planning and budgeting is perhaps the main reason that causes many mortgages to fail in just a few years or so, and the new policies have definitely brought a positive change in the number of foreclosures per year.
Insufficient planning when locking into a mortgage can be disastrous for a potential buyer, as the interest rate fluctuations can spell trouble for them down the road. Thus, it is essential to plan and decide on the payments before you select a mortgage for yourself, so that there are no affordability problems in the future and you do not risk losing your home because of defaulting.
For those of you who are thinking what rules have changed for Canada mortgages and how will they affect new and existing homeowners, here is a quick recap:
- The mortgage amortization period is reduced to 25 years.
- The maximum mortgage refinance allowed is 80%
- The GDS ratio (max) is set to 39% and TDS (max) set to 44%
- For homes over $1 million, no insurance will be provided. Buyers will have to seek insurance privately or put down a 20% down payment.
These rules clearly reflect that only those home owners who will be able to afford the mortgage loan in long term will be able to draw out a mortgage now.
For example, the GDS and TDS ratio are now set at a pre-requisite level so that the lender can ascertain that the buyer has sufficient funds intact to pay for the closing costs, maintenance or any other charges associated with the property. A lot of people previously ignored the closing costs and property taxes etc and they came as a sudden unaffordable burden onto them after the mortgage was active. By raising these levels, both lenders and buyers can be assured of affordability of the loan in question.
Same is the case with luxury homes over the price tag of $1 million. Putting down a 20% down payment at the very least will be beneficial for both the lender and the buyer. The lender can have a sense of security for such a major loan and the buyer can save on additional interests.
Perhaps the most important change of these all is in the amortization, which has been reduced to 25 years. Previously, most Canada mortgages came with an amortization of 30 years, and this reduction has definitely resulted in some raised eyebrows amongst buyers and experts alike. However, shorter amortizations are ultimately more beneficial for the buyers when you look at the bigger picture, as the loan will be paid off faster and a large chunk of cash can be saved in interest for that particular Canada mortgage.