On March 18th the new Mortgage financing rules went into effect. We have been inundated with calls asking about the new rules and how they will affect different scenarios.
Here is a synopsis of the new mortgage rules. We have highlighted the three most important areas and have provided our opinions on how the rules will impact renewals, refinances and new purchases.
Maximum Amortization Period
In high ratio mortgages, where the down payment is less than 20%, the maximum amortization has been reduced from 35 years to 30 years.
In conventional mortgages, where the down payment is 20% or more, the maximum amortization has been reduced to 30 years by the big banks. Thirty-five and forty year terms are still available from some lenders.
How does this affect the average consumer?
On a typical $400,000 - 5-year fixed rate mortgage at 3.94% the drop in amortization from 35 to 30 years increases the payment by $139.42 (1749.10 vs 1888.52) per month or put another way it will increase the monthly payment by $34.85 per $100,000 borrowed. (Check out our rates which are currently lower than the 3.94% in the example.)
Another way of looking at the affect on an average borrower making $60,000 per year is to measure the overall drop in their buying power.
Borrowing limit at 35 year amortization => $367000
Borrowing limit at 30 year amortization => $339000
The reduced amortization causes the borrowing power to decrease by $28,000 in this example.
Once you see the numbers it becomes obvious that the amortization rule change will not make or break most deals. It is unfortunate that most lenders are adapting the new 30-year amortization limit on all loans regardless of the Loan-to-Value ratio. This industry is constantly evolving. I can remember the excitement during the introduction of the extended amortization rules ... first 35 then 40 years. It will be interesting to see if the government eventually scales it all the way back to 25 years.
The good news is that we still have access to the longer term amortizations if our clients need or want them. In fact, a 40 year amortized loan is still available on conventional loans (LTV <80%)...and at some very good rates.
Refinance Maximum Loan to Value
The maximum loan to value for residential properties will be reduced to 85% from 90%.
How Does This Affect YOU?
We see this rule change as an interesting social experiment. The Finance Minister Jim Flaherty is doing his best to stop consumers from bleeding all of the equity out of their homes. By reducing the LTV limit on refinances he is making it harder for borrowers to subsidize their lifestyles via the ETO (Equity Take Out) refinance loan.
While Flahety's intentions are good, the question is will this rule change have the effect on consumer spending habits that he is hoping for? If it does, then this policy change will reduce additional spending (on average) and thus help to reduce Canadian debt levels in general.
Our fear is that people spend money without regard to higher level lending guidelines. We see it in applications that come across our desks every week. People buy cars, take vacations, and rack up credit card debt without thinking about the position they are putting themselves in.
The ETO refinance is the solution to the problem...it is not the cause! If a client can roll $30,000 worth of accumulated debt into their mortgage and drop the carrying cost from an interest rate of 18% to under 4% they are in a far better position. Our argument is that if we don't let them do this refinance, they may be held prisoner to their debt load for many years.
We are not sure who is correct in this argument but it will be interesting to see if this rule change helps to reduce overall debt loads in Canada. It is possible that this rule change will reduce the net debt levels, but at the cost of also reducing the affordability of the debt already incurred.
Refinance of Current Mortgages
The good news is that renewals will not be affected by this rule change. If you keep the terms of the mortgage exactly the same, the mortgage will continue at the original amortization. The only change you will notice is the change in your payments caused by the resetting of the interest rate ... not by a change to the amortization.
Remember, if you change anything in the original mortgage you are subject to the new rules at the time of the refinance and thus will lose the longer amortization!
As always, should you have any questions or concerns, please do not hesitate to contact us.
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