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New Mortgage Rules for Canadians

Q - Can you elaborate on the new mortgage rules that have been announced in Canada?

A - In order to safeguard Canada's economy, new mortgage rules have been announced to keep the housing market healthy and to help ensure households do not become overextended.

The Bank of Canada is likely to keep interest rates low as it expects the U.S. Federal Reserve to continue with low rates to stimulate the U.S. economy.  As a result, changes to mortgage policy, becomes the most reasonable tool to use in order to dissuade Canadians from taking too much advantage of the low interest rates and increasing their debt load.  Should interest rates increase, such debt could become unaffordable.

These changes are to be implemented on 9 July 2012.  This means that if you want to take advantage of the old Canadian rules for obtaining a new mortgage or for refinancing, do it prior to  9 July 2012.

Here are the changes and some of the implications.

The amortization period will be reduced from 30 years to 25 years for high ratio mortgages - those who have a downpayment less than 20% and, therefore, require mortgage insurance to protect the lender.  The 5% downpayment is still valid and is the least one can pay when purchasing a home.

The shorter amortization period means the the monthly payments will be higher but it also means that buyers can build equity quicker and pay less interest over the mortgage term.

Refinancing - the maximum amount that a homeowner can borrow against the equity in the home - will be reduced from 85% to 80%.

The maximum Gross Debt Ratio will be 39% and the Total Debt Service Ratio will be 44%.  The buyer will now be required to have a lower debt threshold ensuring that the loan is viable in comparison to household income.

Government backed insurance will no longer be available for properties over $1 million.  Homes priced above $ 1 million will have to have 20% downpayment.

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