The recent mortgage changes by the Ministry of Finance’s Jim Flaherty came about because the government and the Bank of Canada are concerned about the record levels of household debt. For every $1 in savings, Canadians owe $1.50 and mortgage debt is up around $1 trillion. The Bank of Canada recently warned that debt levels are growing faster than income and could be risky for the economy. These changes not only affect the real estate in Hamilton but across the country. Real estate brokers in the Hamilton area can recommend a mortgage broker but here are some facts before you visit one.
We now have new mortgage rules in Canada for high-ratio mortgages – those are insured mortgages that only require less than 20 per cent down payment. The new rule reduces the amortization of the loan, which means instead of spreading your mortgage loan over 35 years, which reduces your monthly payment, the loan period is now capped at 30 years. Assuming a 4 per cent interest rate, this means approximately $34.72 higher each month for every $100,000 in mortgage.
But all is not lost. This may be challenging for first time home buyers who will have to either come up with a higher down payment or look for a lower-priced home – minimum down payment still remains at 5 per cent. The changes did not eliminate one’s ability to borrow a down payment. That means borrowers can still get their 5 per cent down payment from lenders who offer cash-back down payment programs. And there are lenders not bound by the insurance restrictions who will still offer 35 year amortizations. The reduced amortization does not affect conventional mortgages – those with a 20 per cent down payment. If you are a first time home buyer, it’s important to get a binding purchase agreement before March 17.
Another new rule is for refinances. Many of you have refinanced to consolidate debt, or to renovate your home, or to start a business. Once you could refinance up to 90 per cent of the value in your home, now you will only be able to access 85 per cent of its value.
A small number of niche lenders still offer uninsured refinances to 90 per cent loan-to-value. As time goes on, we can expect additional specialty lenders to hit the market with second mortgages up to 90 per cent. Working with a mortgage broker is your best option here because they have access to many different lenders and different mortgage programs. And it won’t cost you anything.
Lowering the refinance threshold to 85 per cent will impact less than a tenth of all refinances. If you’re one of those affected, it means you’ll be able to refinance an average of $17,228 less debt based on the typical Canadian home value. The average Canadian has $25,163 in non-mortgage debt.
The final mortgage rule change has to do with the HELOC, or Home Equity Line of Credit. The government will not be insuring these as of April 18. If you have one of these before April 18, when the rule comes into effect, they will be unaffected. They will be insured until they are discharged. The unfortunate thing about this new rule is that instead of accessing the equity in your home, and paying a relatively low interest rate, you will likely have to get an unsecured loan, which has a higher interest rate.
With all that being said, analysts are anticipating a burst of activity before the new rules are implemented. With interest rates remaining where they are until at least the spring, it really is a good time to start looking for your new home.