CMHC Mortgage Insurance Changes – Why They Matter
In January 2011, the Canadian federal minister of finance Jim Flaherty announced changes to policies in the Canadian Mortgage and Housing Corporation (CMHC) by underwriting the regulations for high ratio mortgage insurance. The changes in question were designed to stabilize the Canadian housing market and slow down borrowing. Such changes might seem drastic to some, especially Canadian mortgage planners however, some believe that the new rules might lead to long term gains.
The CMHC is the largest insurer in the market which means that any changes in its policies will ultimately affect the country’s high ratio insurance market as a whole. Once the organization alters its lending criterions the shockwaves will be felt by every homebuyer (potential or otherwise) across the country.
According to Canadian law all financial entities require that mortgages that have a loan to value ratio greater than 80% must be insured against default. The Canadian Mortgage and Housing Corporation provide mortgage loan insurance to lenders in case buyers default on their mortgages.
One of the first changes reduced the maximum amortization period from 35 to 30 years. This means that a buyer cannot take more than 30 years to pay back a high ration mortgage loan.
The new change means that an additional payment of about $100 dollars a month is required on a $300,000 mortgage at a 4% interest rate. The additional payment that is required can now make the difference between passing and failing a lender’s income test.
One other change reduced the amount of the maximum loan value that is allowed on high value transactions. The value was reduced from 90% to 85% and was put into effect on March 2011. In other words, this means that buyers who want to refinance their current mortgage can borrow 85% of the current value of a property.
In this way home buyers will have more equity on their property and will be provided with a bigger buffer if home prices drop. In turn, a lender’s loan will also be safe. However, the change will also reduce a consumer’s chance to use a low interest cost mortgage refinancing to pay off any unsecured debts that are high in interest.
Even though CMHC will insure loans for up to 95% of a property’s value on purchase transactions and mortgage refinancing for renovations will be limited to 85% of a property’s value, one question still remains. Will residents choose to move instead of renovate? Experts believe that purchasing seems like a more economical, option.
According to the changes –
- If you are purchasing a home for $1,000,000 the maximum financing tax for it will be 80%.
- Refinancing will be available to a max 80%
- The maximum amortization is now 25 years for mortgage loans that are above 80% financing
- The maximum ratio for Total Debt Service (TDS) qualifying is now 44% for credit scores that are more than 680. The maximum TDS for credit scores that are lower than 680 is 42%.
Only time will tell how the changes in the Canadian mortgage Housing Corporation policies will affect the Canadian housing market.