Mortgage Rule Changes announced by Government of Canada

Mortgage Measures Announced Today

Today, the Government announced further changes to the standards for government-backed insured mortgages. These measures would apply to new high loan-to-value mortgages backed by the Government.

LIMIT THE MAXIMUM AMORTIZATION PERIOD TO 25 YEARS

The amortization period is the length of time it will take to pay off the entire mortgage loan. It is usually much longer than the term of the mortgage. A typical mortgage in Canada may have a term of five years or less during which a specific fixed or variable interest rate will apply, and the mortgage can be renewed at the end of the term.

The measure announced today will reduce the maximum amortization period from 30 years to 25 years for high loan-to-value mortgages, which are backed by government insurance. (Banks will still be able to offer 30-year amortization periods on low ratio—20 per cent or more down payment—mortgages, if they so choose.). For any given mortgage loan, a lower amortization period would result in a moderate increase in the monthly payment along with a significant reduction in the total interest paid over the amortization period. The following table illustrates the benefit of reducing the amortization period from 30 years to 25 years for a mortgage loan of $350,000.

Monthly Payments and Total Interest Savings Resulting From a Reduction in the Amortization Period to 25 Years for a Mortgage Loan of $350,000

Interest Rate	30-Year Amortization—Monthly Payment	25-Year Amortization—Monthly Payment	Difference in Monthly Payment— 25-Year vs. 30-Year Amortization	Interest Savings—25-Year vs. 30-Year Amortization
3 per cent	$1,472	$1,656	$184	$33,052
4 per cent	$1,664	$1,841	$177	$46,832
5 per cent	$1,868	$2,036	$168	$61,765

LOWER THE MAXIMUM REFINANCING AMOUNT TO 80 PER CENT OF THE LOAN-TO-VALUE RATIO

Borrowers can refinance their mortgage and increase the amount of the loan secured against their home. The measure announced today will reduce the limit on refinancing from 85 per cent to 80 per cent of the value of the home. Reducing the maximum refinancing amount to 80 per cent follows the change from 90 per cent to 85 per cent in March 2011. Reducing the maximum loan-to-value ratio on refinancing will encourage Canadians to keep equity in their home and save through home ownership.

As an illustration, for a home valued at $350,000, refinancing at 85 per cent would allow the homeowner to access up to $297,500, whereas refinancing at 80 per cent would allow the homeowner to access up to $280,000. The lower refinancing limit means homeowners will keep an additional $17,500 in the equity of their home and at the same time save up to $5,200 in insurance premiums.

LIMIT THE GROSS DEBT SERVICE RATIO TO 39 PER CENT AND TOTAL DEBT SERVICE RATIO TO 44 PER CENT

There are two ratios commonly used to measure the risk associated with household debt: the gross debt service (GDS) ratio and the total debt service (TDS) ratio. The GDS ratio is the share of the borrower's gross household income that is needed to pay for home-related expenses, such as mortgage payments, property taxes and heating expenses. The TDS ratio is the share of the borrower's gross income that is needed to pay for home-related expenses and all other debt obligations.

Lenders must review a borrower's debt service ratios before granting a mortgage loan. In 2008, the Government announced a 45 per cent TDS limit as part of the adjustments to the rules for government-backed insured mortgages. The measure announced today will limit the GDS ratio to 39 per cent and lower the maximum TDS ratio to 44 per cent. Setting a GDS limit and lowering the TDS limit will help prevent Canadian households from overextending themselves and reduce the number of financially vulnerable households.

LIMIT THE AVAILABILITY OF GOVERNMENT-BACKED INSURED MORTGAGES TO HOMES WITH A PURCHASE PRICE OF LESS THAN $1 MILLION

The measure announced today will establish that government-backed mortgage insurance is only available for a new high loan-to-value mortgage if the home purchase price is under $1 million.

Establishing a maximum allowable price will ensure that government-backed mortgage insurance operates the way it was originally intended: to help working families and first-time homebuyers. According to the Canadian Real Estate Association, the national average price (based on Multiple Listing Service sales activity) for a home sold in May 2012 was $375,605. This measure is expected to have a negligible impact on working families and first-time homebuyers as the vast majority of these borrowers purchase properties priced below the threshold. Borrowers purchasing homes priced at or above the maximum allowable price would require a down payment of at least 20 per cent.

IMPLEMENTATION OF THE NEW FRAMEWORK

These adjustments will come into force on July 9, 2012. Exceptions would be allowed to satisfy a binding purchase and sale, financing or refinancing agreement where a mortgage insurance application has been made before July 9, 2012. While the changes announced today come into force on July 9, 2012, any mortgage insurance applications received after June 21, 2012 and before July 9, 2012 that do not conform to the measures announced today must be funded by December 31, 2012