“Our Government stands behind the efforts of hard-working Canadian families to save by investing in their homes and their future,” said Minister Flaherty. “The adjustments we are making today will help them realize their goals, build on the previous measures we have introduced to keep the housing market strong, and help to ensure households do not become overextended. As just one example, the reductions to the maximum amortization period since 2008 would save a typical Canadian family with a $350,000 mortgage about $150,000 in borrowing costs over the life of that mortgage.”The main changes that were implemented today are the following:
1. Maximum amortization for government insured mortgages reduced from 30 to 25 years.
2. Lower the maximum refinance amount from 85% to 80%
3. Re-adjust lending requirements for a GDS of 39% and a TDS of 44%.
So what do these new guidelines mean, and how do they affect us? Well, decreasing the maximum amortization - though it does mean buyers pay less interest - equates to higher monthly prices, which then challenges affordability and qualifying. A $300,000 home on a 30 year amortization may cost $1200/month, but on a 25 year am can cost upwards of $1400/monthly. You end up paying off your home at a faster pace, but the other complication is what the bank will allow for you to purchase. When you look to make a purchase, the bank weighs your income against your debt and the mortgage price of your home. They then determine if your income qualifies you to sustain this mortgage. When the monthly payment becomes higher, the strings start to tighten, and what may have been affordable at a 30 year amortization, may no longer be affordable at a 25 year amortization.
Lowering the maximum refinance amount to 80% ensures that owners maintain equity and liquidity in their home. This also means that insurance will no longer be required. The percentage is calculated as a percentage of the value of your home - not of your current or previous mortgage, but of the market value of your home.
GDS (Gross Debt Service) and TDS (Total Debt Service) measure how much your responsibilities are serviced by your income. Simply put, GDS is your mortgage (and taxes) versus your income, and TDS is your mortgage, taxes, and debt, versus your income. Previously, your ratios could be GDS - 35% and TDS - 44% (depending on your credit score). Now, GDS is increased to 39%. This is of a very minimal impact, as the TDS has not changed.
I know this is all a bit heavy, but what we need to keep in mind is that this is for government insured mortgages. In Canada, you can have your mortgage insured by CMHC, Canada Guaranty or Genworth - so there are still options available. We have to remember that our government will do anything possible to avoid mimicking the US housing crisis - in which the American government had to provide financial aid to Fannie Mae (their version of CMHC). They are tightening CMHC guidelines to ensure this.
