How Will New Mortgage Amortization and Refinance Rules Affect Me?

The Canadian Government continues to worry about the ever-increasing debt load of Canadians.  Debt to Personal Disposable Income ratios have climbed to a whopping 152 per cent!  Jim Flaherty needed to pump the breaks and slow Canadians down before reaching the toxic 160 mark – the rate that sparked a major downturn in both the British and American economies.

What Are the New Changes?

1. Reduce the maximum amortization period from 30 years to 25 years
2. Reduce the maximum loan to value (LTV) ratio on refinances from 85 per cent to 80 per cent
3. Insurance is limited to homes with a purchase price of less than $1-million
4. Maximum gross debt service ratio (GDSR) fixed at 39 per cent and total debt service ratio (TDSR) fixed at 44 per cent

Changes will take effect July 9th, 2012 in efforts to cool some red hot Canadian markets – namely Toronto and Vancouver.

Deflating the Bubble

Mark Carney has warned Canadians to anticipate a rate hike in an attempt to keep consumer spending in check and dampen the side effects of having rates so low for so long.  However, Carney can ride the coattails of Jim Flaherty with his big announcement today.  Carney is able to monitor the effects of these changes to the Canadian economy and hold off on any rate changes amid the uncertainty of the global markets.

TD’s Chief Economist Craig Alexander mentions that the full effect of this change will not be felt for about a year and anticipates that the amendments will signal home prices to decrease on average by 3 per cent and overall home sales to fall by 9 per cent.

The Best Way to Get Results

Avery Shenfeld of CIBC World Markets feels that Flaherty made a smart move.  Something had to be done and the government could only sit back to watch this bubble take form for so long.  Fortunately there is a solution aside from announcing rate hikes – which could further deteriorate an already weak economy.  This solution speaks loudly to the housing market whereas the repercussions of a rate hike would be felt across many industries.

What Do These Changes Mean for the Canadian Consumer?

On Amortization:  Keep in mind that the increased challenge of affordability will only be felt by those who are looking for a 30 year amortization who have less than a 20 per cent down payment.  Conventional mortgages will still be offered on a 30-year basis.  For any given mortgage, a lower amortization period will mean a slight increase in monthly payment; however a substantial decrease in the amount of interest paid over the life of the mortgage.

On Refinance:  Capping the maximum loan to value on a refinance at 80 per cent will ensure that home equity remains at a healthy level and hopefully assist with keeping consumer debt levels under control.  Decreasing the LTV on a refinance will also save consumers on CMHC insurance premiums.

On Debt Servicing Ratios:  Lowering the GDSR and TDSR will prevent Canadians from overextending themselves and hopefully reduce the number of financially vulnerable households on the market.

Waiting for Your Mortgage to Fund?  What You Need to Know:

Exceptions will be made to satisfy existing purchase and sale, financing or refinancing agreements where an insurance application has been made before July 9th, 2012.  Although the announcement was made today, any insurance applications received between now and July 9th, 2012 that do not meet the new regulations must be funded by the end of the calendar year.


If you’d like to speak to a mortgage expert about these rules in more detail, you can…



Related Topics

Buying A Home / Home Ownership / Mortgages

28 thoughts on “How Will New Mortgage Amortization and Refinance Rules Affect Me?

  1. I just got married 6months ago and we were thinking to buy new small house for us instead of paying freaking $1200 for rent but now thanks to new mortgage rule we cant even think over it…..so there should be some new rule for rental apartments too they are also suckers.

  2. I think the new rules are dumb. I am a father of 4, and now getting a house is out of the question… But on the brightside, I can look forward to higher rents do to the fact that there will more families in the same boat as myself.. the landlords know this and will soon hike up rents because we are trapped with no way to save for a house, just another instance of our government catering to the well to do

  3. Thank you for your comments and I agree that these changes could potentially lead to an increase in overall rent levels when you consider the supply and demand side of things. The bottom line is that something had to be done to help the debt-to-income ratio which is currently sitting at 151 per cent and unfortunately historically low interest rates were only intensifying things. No, not every Canadian has this level of debt but unfortunately we will collectively feel the repercussions to policy changes.

  4. To Android 68: The new rules that have come into play surrounding a reduced amortization and new refinancing rules are strictly aimed at insured mortgages. But not to worry if you currently have a mortgage with an amortization greater than 25 years, you will still be able to maintain your amortization schedule at renewal/maturity as default insurance is good for the life of the mortgage.

    • couple of weeks back, we posted about how moratgge rates had reached record lows not seen in the past 60 years, and how people were taking advantage of these low rates as a means

  5. What happens at renewal time if I want to switch lenders? Or does this mean I’m stuck with the same lender and they can do what they want cause they know I can’t move?

  6. hi laura, we have our mortgage with first national but they don’t offer Home equity loan – Line of credit..Can we get home equity loan or line of credit from other institutions? One bank says that we cannot. please confirm. thanks!

  7. We have a fixed rate mortgage and when we got it 3 1/2 yrs ago, we dediced that the best thing for us (not for everyone, obviously) was to lock in for a 10-yr term at 5.5%. Yes, the variable rates are super low and have been for the last 2 yrs or so, but we sleep well at night knowing we calculated what we could afford monthly for a 10 yr period and we have no worries about what the rates will do for the remaining 6.5 yrs left on our term. We can afford 5.5% and probably upwards of 7-8% if necessary and we also have some wiggle room to temporarily extend the amortization from the current 16 yrs back up to 20-25 or even 30 yrs if we are suddenly down a significant amount of income. We’d hate to do that, but it’s an option in the case of a sudden temporary income loss.

  8. Hi Laura, so what happens to the consention of 5% down payment for firt time home buyers. is that still possible.

  9. To Stew: At renewal time you are still able to switch lenders. CMHC insurance is good for the life of the mortgage so as long as you are not looking for a refinance (meaning take out more equity from your home or extending your amortization), you are in the driver’s seat!

    • Hi Laura,

      If I have a 35 year mortgage, will I be able to reduce the term at the end of my 5 year term? If I decide to switch to a different lender, what are the things I can do or cannot do to keep the 35 year amortization intact. Can I shorten the term or does it have to always be every five years?

      Employment opportunities are not all that great and so we want the flexibility to prepay rather than move to a 25 year amortization. Thank you.

  10. To Vina: You are correct, not all lending institutions offer HELOCs. Yes, you can get a HELOC from another institution but the trouble is finding a lender that is ok with being registered in second position behind your first priority mortgage.

    If (for whatever reason) you were no longer able make your mortgage payments – your property would be put on the market through a Power of Sale.

    Once the property was sold, the debts are paid out in registered priority sequence: beginning with a First National payout and the remainder going to whomever holds the HELOC.

    • My plan does not include a tinlieme to have our current home paid. I expect that we will sell our current home before we pay it off. We plan to have a mortgage for the foreeable future. I see a manageable mortgage as a good thing as we are leveraging the borrowers funds to own a stable and slowly appreciating asset.I have never considered selling and renting. Why do you ask?

  11. To Fabricio: You’re right, consumers make their choices based on what speaks the loudest to them and try to capitalize on what is most important. It sounds like you prefer to make a plan, stick to it and have the peace of mind knowing that you’re ready for whatever the next 10 years has to offer.

    I like you’re thinking and attitude towards seeing PAST a low rate and finding other positive aspects to a product. Sometimes it’s not all about rate.

    Congratulations on a successful 10 year plan and thank you for sharing!

  12. To ELder: Yes, first time home buyers can still qualify for a mortgage with the minimum 5% down payment amount as long as the down payment comes from a traditional source (savings, RRSPs, sweat equity, proceeds from sale of existing property, gift from immediate family member etc.).

    For a full list of details on the new CMHC rules, please visit CMHC at http://www.cmhc-schl.gc.ca/en/hoficlincl/moloin/hopr/hopr_001.cfm##. You can hover over any * for definitions and further clarification.

    Thank you for your question!

  13. Laura, the rules will actually do very little to address the debt to income ratio as you suggest. The real problem here is with unsecured credit. There are no debt ratio calculations applied on a client when they are applying for unsecured credit. If their credit score is good then they will be approved. Bottom line.

    Mortgages are FAR less profitable for the banks than credit cards and lines of credit so they clearly would prefer to see those left wide open. So because the banks knew that something must be done for political reasons, they lobbied the government to control mortgages…and of course because the banks are powerful lobbyists in Canada they got their way. And what did the Canadian consumer get? They had their access to 3% money greatly restricted while their access to borrow money at 6-24% was left completely wide open. Great idea right?

    • Great post MG!Finally someone doing the math and tanikg the more sensible approach. Pay down debt when interest rates are high, and slow down payments when rates are low.I’m always amazed how there are so many people that spout nothing but pay down the mortgage first, pay down the mortgage first. By maintaining my investing over the past 2 years, I’ve easily grown my investments more than the interest I will be paying over the term of my mortgage.

  14. Fabricio, you should look at getting out of your mortgage after your 5th year is up. The Interest Act allows for people to only pay the 3 month interest penalty instead of the Interest Rate Differential (IRD) for terms of over 5 years after the 5th year is complete. You could lock into the low rates on a new 5 year term at close to half your interest rate your paying now.

  15. I am have been looking to buy a house for a while now but still don’t feel the time is right. My surviving parent would like to add my name onto her title as a joint owner. How would this affect my purchase of a house if at all.

  16. To Warren: I completely agree with you! The Canadian banks definitely earn a greater spread on their unsecured debt and love handing out increases on these product limits whenever possible. However, I would like to set the record straight (as an ex-banker who used to work at one of the major 5 banks) and say that TDS ratios are taken into consideration for any type of credit application – be it secured or unsecured as part of the approval criteria.
    I am not familiar with the lobbying of the banks to the government but this is something that has sparked my interest and wish to find out more information on. What you are suggesting does make sense though; and no, it isn`t ideal for the Canadian consumer to be granted a green light to high-interest, unsecured debt while struggling to finance a mortgage. However, I do support the Government’s efforts to ensure that both the Canadian economy and consumers alike are well equipped to deal with any future market fluctuations – by a means of a safe amount of equity in their homes. Removing the cash-back mortgage and no income confirmation products – as two examples – is a step in the right direction in my mind.

  17. To Theresa: If you are a joint owner on the home this shouldn’t cause major problems if the home is free and clear. If you are joint owner on the mortgage/HELOC registered on the home as well then this could affect your debt servicing ratios and ultimately the decision to approve you for a mortgage. What you really want to ensure is that your decision to go on title doesn’t affect your eligibility for a mortgage.

    Every lender has different requirements that you must meet in order to be considered for approval. These have to do with your credit bureau, beacon score, loan to value, your debt servicing ratios and income. If there is a chance of mortgage payments or taxes going into arrears, this could even affect you. And then you must also meet CMHC’s guidelines if you require insurance as well. Keep these guidelines in mind when you consider your next move – if the home is free and clear from any mortgages/HELOCs then many of these issues aren’t applicable.

    • mortgages are priced a lot dtfnerefily than car loans even if the highest allowed rate was only 9%, that would make the monthly payment $ 100 s more per month than a 5.5% mortgage and probably put you over the eligibility level -3Was this answer helpful?

  18. i was in a excalibur mortgage which expires nov.13/2012 first national has ended doing excaliburs & has informed me they not will switch it over or renew. as only putting 5% down originally & being privately insured(which i didn’t know) my outstanding debt is 85%-90% to fair market value. as a single parent i don’t have the difference to pay it down. it’s unfair that we might lose our home due this rule change, working with a broker on this but do you have suggestions or know of a hardship clause that covers these situations?? i’m sure i’m not alone. thank-you

  19. Hi. I currently have a mortgage with 5 years left on it..If I was to buy a retirement home right now while still holding this mortgage how much of a down payment would I need? I don’t want to have to wait and sell this place in order to buy my retirement house. Thanks for your help!

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