FAQ 2012 Mortgage Changes

 

Frequently asked questions

2012 Announcement on Measures to Support the Long-Term Stability of Canada’s Housing Market

General

Q. Why is the Government making these changes at this time?

A. These measures will support the long-term stability of the Canadian housing and mortgage markets and promote savings through home ownership. They are intended to be timely, targeted and measured. The measures will reinforce the importance of borrowing responsibly and using home ownership as a savings vehicle. The Government actively monitors developments in the housing market and is committed to taking action when necessary.

Q. What will be the impacts of the adjustments to the rules for government-backed mortgage insurance on the Canadian economy?

A. The adjustments to the rules for government-backed mortgage insurance will provide significant benefits to the Canadian economy by supporting the stability of the housing market and promoting savings through home ownership. The short-term impact on the housing market is expected to be manageable, given that the majority of Canadian families are already taking a prudent approach in managing household debts. In the long term, these measures are expected to have a positive impact on the economy through higher savings and a lower number of financially vulnerable households.

Q. When do these measures take effect?

A. The new measures will take effect on July 9, 2012.

Q. Are further measures expected?

A. The Government actively monitors developments in the housing market, consumer debt and the economy, and is committed to taking action when necessary to support the long-term stability of the housing market and protect the investment of Canadian families.

Q. Do these measures apply to multi-unit buildings?

A. These standards apply to mortgages on residential property with four units or less.

Q. Why is the Government lowering the limit on refinancing again?

A. The new measure announced today will reduce the maximum amount on refinancing to 80 per cent from 85 per cent of the value of the home. Limiting the amount of refinancing will promote saving through home ownership and limit the shifting of consumer debt into mortgages guaranteed by taxpayers.

Q. Why is the Government lowering the maximum amortization period again?

A. The new measure announced today will reduce the maximum amortization period to 25 years from 30 years. Limiting the maximum amortization period will reduce the total interest payments Canadian families make on their mortgages, helping them build up equity in their homes more quickly and pay off their mortgages sooner.

For example, reducing the amortization period from 30 years to 25 years on a mortgage would result in a moderate increase in the monthly payment. However, over the life of the mortgage, this modest increase would result in a significant reduction in the total interest payments. For a $350,000 mortgage at 4 per cent interest rate, the interest savings could be over $45,000.

Q. Why is the Government limiting the maximum gross debt service (GDS) and total debt service (TDS) ratios?

A. 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, such as credit cards and car loans.

The new measure announced today will set the maximum GDS ratio at 39 per cent and reduce the maximum TDS ratio to 44 per cent. These debt service ratios measure the share of a household’s income that is required to cover payments associated with servicing debt. Both measures are already used by lenders and mortgage insurers to assess a borrower’s ability to pay. Setting a GDS limit and reducing the TDS limit will help prevent Canadian households from getting overextended and reduce the number of households vulnerable to economic shocks or an increase in interest rates.

Q. Why is the Government introducing a maximum allowable price for insured mortgages?

A. The new 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 less than $1 million. Because homes priced at or above $1 million would not be eligible for government-backed high ratio insurance, borrowers for these homes would require a down payment of at least 20 per cent.

Introducing 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. 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.

Concerns about borrowers

Q. I already have an insured mortgage. How will these changes affect me?

A. Mortgage insurance is good for the life of the mortgage. Borrowers renewing their insured mortgages will not be affected by these changes. For example, if a borrower had a 30-year amortization and there are 27 years remaining on the mortgage, the mortgage can be renewed with a 27-year amortization, as long as no new funds are being added to the mortgage.

Q. What is required to qualify for an exception to the new parameters?

A. The new measures will apply as of July 9, 2012. Exceptions will be made 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 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.

Q. Will a purchase and sale agreement dated prior to July 9, 2012 be considered binding if there are outstanding conditions that have not been fulfilled prior to July 9, 2012?

A. Yes, if the date on the purchase and sale agreement is earlier than July 9, 2012, and a mortgage insurance application has been made prior to that date, the new parameters will not apply, even if the conditions of the agreement have not been waived.

Q. Will the new refinancing rules allow a borrower with a mortgage above 80 per cent loan-to-value (LTV) to refinance by extending the amortization period?

A. No. Effective July 9, 2012, borrowers will not be permitted to refinance a mortgage above an 80 per cent LTV, unless the borrower has a binding refinance agreement dated prior to July 9, 2012, and a mortgage insurance agreement has been made prior to that date.

Q. I have a written mortgage pre-approval from a lender, dated before July 9, 2012 with a 30-year amortization. Will I still be eligible for a 30-year amortization if I don’t sign an agreement of purchase and sale until July 9, 2012 or later?

A. No, a mortgage pre-approval without an agreement of purchase and sale is not sufficient to qualify for a 30-year amortization. You may have a 30-year amortization only if your agreement of purchase and sale is dated before July 9, 2012 and you have made a mortgage insurance application before July 9, 2012. You may wish to discuss with your lender to revise your mortgage pre-approval using the new parameters announced today.

Q. Will the new parameters apply to assignment (“switch” or transfer) of a previously insured loan from one approved lender to another?

A. No. As long as the loan amount and amortization period are not increased, the new parameters will not apply to a switch/transfer/assignment of the mortgage to a different lender.

Q. If I sell my current home and buy another, will the new parameters apply if I transfer the outstanding balance of my insured mortgage to the new home?

A. As long as the outstanding balance of the insured loan, the LTV ratio and the remainder of the amortization period are not increased, the new parameters will not apply when the mortgage insurance is transferred from one home to another.

Q. What if I need to increase the amount of my insured loan when I sell my current home and buy another?

A. In this situation, the new parameters will apply for any insured loan.

Q. If I bought a condo that is not expected to be built for another two years, will the new parameters apply?

A. If you bought a condo and have made a mortgage insurance application on or before June 21, then the new parameters would not apply.

If you buy a condo and make a mortgage insurance application after June 21, the new parameters will apply if the mortgage loan is not funded by December 31, 2012.

Department of Finance Canada

 

 

 

CMHC Limits refi's to 80%

 

 

 

 

At 8:15 am Finance Minister, Jim Flaherty has announced four changes to mortgage insurance rules.

·         Maximum Amortizations go to 25 yrs;

• mortgage insurance for properties over $1 million;
•  Refinancings reduced to 80%
• TDS and GDS  at 44 and 39%

http://www.theglobeandmail.com/report-on-business/ottawa-tightening-mortgage-rules-no-more-30-year-amortizations/article4358876/

Effective date for these changes will be July 9^th 2012.

The Maximum 80% refinances is by far the most significant change that will affect most Canadian Homeowners.

 

CMHC has officially stepped out of the mortgage refinance business.

 

Looks like CMHC is only in it for Purchases at the moment.

 

Yet to be announced is whether Genworth or Canada Guaranty, the 2 privately run mortgage insurance companies will follow suit.   Genworth has already once in the past not followed CMHC’s policies changes with maintaining the previous stated income policy.   So they might not necessarily follow this move.  I am sure an announcement will follow shortly.

 

OSFI is also coming out with their announcement later today, word on the street is the qualifying renewals is off the table, but the Lines of Credit limits being reduced to 65% is likely to be implemented.  I will send an email once they are announced.

 

If this is not enough changes to consider I have one more, First Line Mortgages, previously one of the largest lenders used by Mortgage Brokers is closing their doors effective July 1 2012.

 

It’s never good when we lose a lender, as it takes options away from clients, and reduces competition in the Market place. 

 

Any commitments made by First Line will remain in place and will close, but as of July 1 2012 no new business will be accepted.

 

 

There you have it, possibly one of the busiest days in our mortgage world.

 

Throughout all of this, rates have remained unchanged at the moment, but we are waiting for the bond market’s ration to these changes to see what pressure will be put on rates.   

 

Thanks,
 
David Kendall
 
Mortgage Agent
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Eric Lam, National Post
Thursday, Jun. 21, 2012

The federal government is taking another stab at getting Canadians to rein in their borrowing and spending, introducing new mortgage restrictions Thursday to cool the housing market.

The tighter rules, which include lowering the maximum amortization period on mortgages to 25 years from 30 years, lowering the maximum amount of refinancing to 80% from 85%, capping the maximum debt ratios for households and limiting government insurance to mortgages of less than $1-million, will come into effect on July 9.

“The adjustments we are making today will help [households] 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,” Jim Flaherty, federal minister of finance, said in a release Thursday.

Here’s a look at how economists are evaluating the moves and their implications for the slowly recovering Canadian economy:

Derek Holt and Dov Zigler, economists, Scotia Capital

Home sales will accelerate very briefly over the next couple of weeks before the July 9th implementation period. We are more convinced of our view that the BoC is on hold until mid-2013 and with fatter tail risk in favour of a longer hold. Our bias is that strong cumulative regulatory tightening pushes out rate hikes, supports a buy-Canada-bond bias, poses downside risks to CAD, and will materially soften growth in housing, consumer spending, jobs, and add to already evident slowing in credit growth.

Robert Kavcic, economist, BMO Capital Markets

The reduction to a 25-year from 30-year period is equivalent to about a 0.9 ppt mortgage rate increase (assuming a 3.3% 5-year fixed rate and a $290k mortgage after 20% down on an average-priced $363k home). Notably, the impact is bigger than the switch from 35- to 30-year mortgages, which at current mortgage rates, would be equivalent to about 0.6 ppts of tightening. It’s also important to keep in mind that the amortization change won’t impact affordability across the entire market, but ra ther those that would be taking a 30-year amortization—according to the Canadian Association of Accredited Mortgage Professionals, that made up 40% of mortgages for purchase during 2011/12 (up to May).

Jennifer Lee, senior economist, BMO Capital Markets

April doesn’t look like a good month for the Canadian economy. The news that Canada would be tightening rules for government-insured mortgages (cutting the max amortization period from 30 years to 25 years), is an attempt to cool the housing market (FM Flaherty says they need to calm particularly the condo market in a few Canadian cities) and to slow the run-up in household debt that the Bank of Canada has been warning about to just about everyone. And so far, consumers are heeding the warnings. Canadian retail sales unexpectedly fell 0.5% in April, worse than the consensus view for a 0.3% gain, and our call of a 0.1% rise. It looks like GDP for April is coming in at a modest +0.1%, or flattish. In other words, the economy struggled to post any growth in April.

Tim Hockey, chief executive, TD Canada Trust

Canadian household debt levels have reached levels that raise concern. Today’s decisions by Minister Flaherty to move to a 25 year maximum amortization, as well as actions taken by OSFI, take direct aim at the issue and they should have a substantial moderating effect on the growth of Canadians’ debt levels.

Craig Alexander, chief economist, TD Economics

We view the changes announced today as a prudent decision to address the increasing risks from consumer debt growth. The regulatory action helps to take pressure off the Bank of Canada. The rapid personal debt growth in recent years has been fuelled by strong real estate markets in a sustained, incredibly low interest rate environment. Since the imbalance is concentrated in real estate, monetary policy would be a blunt tool to address the concern. Tighter regulations could target the risk more directly .

It should be noted that the tightening of the mortgage insurance rules is coming amid stricter guidance from OSFI, the chartered bank regulator, which includes limiting Home Equity Lines of Credit (HELOCs) to a maximum loan-to-value of 65% and imposing more restrictive equity lending criteria. Together, the new mortgage insurance rules and the more constrained supply of credit should go a long way in addressing the risks from personal debt and overvaluation in real estate.

 

Tighter Mortgage Insurance Rules to Temper Personal Debt Growth and Cool Real Estate

 

TD Economics

 

Data Release: Tighter Mortgage Insurance Rules to Temper Personal Debt Growth and Cool Real Estate

 

• In a surprise move, the Government of Canada announced today that it was tightening mortgage insurance rules for the fourth time in four years.  In total, four new measures were announced for new government‑backed insured mortgages. 
• The maximum amortization period was lowered from 30 years to 25 years.
• The maximum amount that Canadians can borrow when refinancing their homes was lowered to 80% from 85% of the value of their homes.
• Households are now being constrained to a maximum gross debt service ratio and maximum total debt service ratios of 39% and 44%, respectively.
• Government-backed insured mortgages will now be only available on homes with a purchase price of less than $1 million.
• These new rules will take effect on July 9, 2012.

 

Key Implications

• We view the changes announced today as a prudent decision to address the increasing risks from consumer debt growth
• The regulatory action helps to take pressure off the Bank of Canada.  The rapid personal debt growth in recent years has been fuelled by strong real estate markets in a sustained, incredibly low interest rate environment.  The Bank of Canada acknowledged in the Financial System Review report that household indebtedness is "the most important domestic risk to financial stability in Canada." This situation created a challenge for the conduct of monetary policy. On the other hand, the outlook for modest economic growth implies that inflation should remain well-contained in a low interest rate environment.  The low interest rate environment is aimed at stimulating economic activity.  In addition, with the U.S. Federal Reserve on hold, the Bank of Canada must be sensitive to the fact that higher domestic interest rates would propel the Canadian dollar higher, dampening exports and economic growth.    
• Since the imbalance is concentrated in real estate, monetary policy would be a blunt tool to address the concern. Tighter regulations could target the risk more directly.  And, the impact on real estate markets is roughly equivalent to a 1% increase in interest rates.
• While the real estate market remained firm after the prior tightening of mortgage insurance rules, our assessment is that they did indeed slow personal debt growth.  Had the government not previously taken action, the ratio of personal debt-to-disposable income would be higher than 160%, the peak in the U.S. before their financial crisis.  Because the government did act, the ratio stands at 152% today.  The problem is that while debt growth did slow in response to the policy tightening, it continues to grow faster than income.  Given the pace of debt growth, further regulatory action was called for.  The effect is akin to gradually tapping on the brakes to temper borrowing and real estate markets.  This gradualist approach is sound given the risks involved. 
• It should be noted that the tightening of the mortgage insurance rules is coming amid stricter guidance from OSFI, the chartered bank regulator, which includes limiting Home Equity Lines of Credit (HELOCs) to a maximum loan-to-value of 65% and imposing more restrictive equity lending criteria.  Together, the new mortgage insurance rules and the more constrained supply of credit should go a long way in addressing the risks from personal debt and overvaluation in real estate. The actions support our long standing view that the current 10-15% overvaluation in Canadian real estate will be unwound over the next couple of years.  It also suggests that personal debt growth should slow to a low single digit pace over the coming year.

 

 

Craig Alexander, SVP and Chief Economist

416-982-8064

 

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This report is provided by TD Economics. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.