July 17, 2012

Financing a home deal: What the new rules mean to you

BY KYLE GREEN

On July 9, federal Finance Minister Jim Flaherty’s latest round of new mortgage guidelines kicked in. Shortly after, the Office of the Superintendent of Financial Institutions announced it was getting closer to finalizing its new guidelines for federally regulated banks. What does it mean for you? If you aren’t sure, you aren’t alone. A recent BMO study revealed that only about half of Canadians understand the new mortgage guidelines and how they may affected by them. Here is a quick summary of the changes:

Effective July 9 on insured mortgages (more than 80 per cent financing):

  1. Maximum amortization to shrink to 25 years from 30 years. This will increase mortgage payments by about 12 per cent on average.
  2. Limit on debt servicing for GDS (Gross Debt Service, which is all property-related expenses such as mortgage payments, taxes, heating, condo fees and so on), to 39 per cent from 44 per cent.
  3. Ban on mortgage insurance on properties over $1 million.
  4. Refinancing restricted to 80 per cent, down from 85 per cent.

Effective, likely in October, for federally regulated banks:

  1. Home equity lines of credit reduced to 65 per cent, although it appears an additional 15 per cent is allowed (to 80 per cent) if that 15 per cent is amortized.
  2. Banks required to qualify all variable terms and terms of less than five years at the Bank of Canada five- year benchmark rate (typically RBC’s five-year posted rate). Today, many banks will qualify shorter terms at the actual rate if the deal is conventional (more than 20 per cent down payment).
  3. All “Stated Income” borrowers must provide reasonable income verification such as a Notice of Assessment.
  4. Cash back will not be allowed to be used toward a down payment. Currently a few banks allow five per cent cash back to be used towards down payment (making it effectively a $0-down deal). Of all of the rules put forth, this one makes the most sense in today’s economy.

Who will be affected?

  1. Homebuyers hoping to get a “zero- down” mortgage using cash back.
  2. Homebuyers who were very close to their maximum qualifications before the rule changes.
  3. Purchasers in the $1-million price range with less than 20 per cent down payment.
  4. Self-employed borrowers who write off a lot of their income.
  5. Existing homeowners who have an amortization longer than 30 years, less than 20 per cent equity in their property and would like to shop around for a better mortgage rate.

First-time buyers feel pinch

So far, banks seem comfortable lending to those needing less than 80 per cent financing on 30-year amortizations, but this could change. So for now, those who will really feel the changes are first-time home buyers or those hoping to consolidate other debts with their mortgage in the near future. The average purchaser with less than 20 per cent down will qualify for about 17 per cent on their next purchase with the revised amortization and debt servicing guidelines. There is a silver lining, however. Mortgage rates are still extremely low, with many lenders offering close to three per cent for five- year fixed terms, and rates even lower for shorter terms.

For many first-timers, it can be cheaper to own than to rent, as it is only $478 a month per $100,000 borrowed for their mortgage payments. Perhaps more attractive is that a whopping $222 of that $478 per month (46.5 per cent) goes toward principal on the very first payment. Assuming even a zero per cent appreciation in real estate prices for the next five years, it could be a smart move to own strictly from a monthly payment perspective. Insurers have already tightened the screws and are declining more deals than before. Don’t get too hung up on getting the best interest rate – be more worried about getting the money in the first place.

Special to The Sun

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