There has been a lot of changes over the past few years to the rules around home financing. Especially when it comes to financing a home with less than a 20% down payment. I wanted to revisit the last four changed the Government announced on June 20th, 2012 that came into effect on July 9th of last year.
The four measures for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent are:
- Reduce the maximum amortization period to 25 years from 30 years. This 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. The maximum amortization period was set at 35 years in 2008 and further reduced to 30 years in 2011.
- Lower the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent of the value of their homes. This will promote saving through home ownership and encourage homeowners to prudently manage borrowings against their homes.
- Fix the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent. This will better protect Canadian households that may be vulnerable to economic shocks or an increase in interest rates.
- Limit the availability of government-backed insured mortgages to homes with a purchase price of less than $1 million.
There are a number of reasons for these changes including the obvious which is Government and the Bank of Canada's concern for people taking on too much debt before rates rise. There is also speculation that the reason they are making the changes right now is that rates are now expected to stay at these rock bottom levels now until 2014.
What does this mean for borrowers. On one had it means your monthly payment amount will be a bit higher but on the other it means you'll pay a lot less interest within a 25 year mortgage as compared to a 30 year one. It also means that, for now these historically low interest rates look like they may be staying around for a while longer which, again, cut the amount of interest you'll pay and increases the amount that will go to the principal or balance owning.
Feel free to contact me to determine how much these changes will or won't affect you.
Tony Marchigiano | Mortgage Specialist - Mortgage Sales BC Region, RBC Royal Bank | Royal Bank of Canada | T. 604-505-7109 | F. 778-737-0054