by Graydon Ebert, Associate
The Government of Canada has recently introduced new rules for all mortgages insured by the Canadian Mortgage Housing Corporation (“CMHC”). The law requires that mortgage insurance must be obtained from CMHC where the homebuyer has made a down payment of less than 20%. The government made 4 important changes to the rules.
1) The maximum amortization period has been reduced from 30 years to 25. The effect of this change is that monthly mortgage payments will be slightly higher as they will be amortized over less years, but the interest paid over the mortgage will be significantly reduced.
2) The maximum loan amount that a borrower can get when refinancing has been reduced from 85% of the value of the home to 80%.
3) The government has introduced limits on the gross debt and total debt ratios that lenders use to assess a borrower’s ability to pay when approving the borrower for a mortgage.
4) Mortgage insurance is only available for homes with a purchase price of less than $1 million. For homes over $1 million, the borrower must make a down payment of at least 20%.
Now perhaps you are in the market, looking for a new home. Maybe you have already been pre-approved for a mortgage. Maybe you have signed an agreement of purchase and sale and have made a mortgage insurance application. Maybe you have bought a condo but it hasn’t been built yet. Maybe you are looking to refinance or renew your mortgage. If you are in any of these situations, you probably want to know if these new rules will apply to you.
The first thing to remember is that if you make a down payment of 20% or more, these rules do not apply to your mortgage.
The new rules take effect July 9, 2012. They will not apply where a mortgage application has been made before July 9,2012 to satisfy a binding agreement of purchase and sale, financing or refinancing agreement. If your agreement of purchase and sale is dated earlier than July 9, 2012 and a mortgage insurance application has been made before that date, the new rules will not apply, even if there are outstanding conditions in your agreement that have not yet been fulfilled.
Any new mortgage insurance application received between June 21, 2012 and July 9, 2012 that does not conform to the new rules must be funded by December 31, 2012. This is relevant to those who are considering purchasing a condo in the near future that has not been built. If the purchaser has bought a condo that hasn’t been built and made a mortgage insurance application between June 21, 2012 and July 9, 2012, the new rules will apply if the mortgage is not funded by December 31, 2012. So you have to be careful. If you are thinking about purchasing a condo in the next couple weeks that you won’t be paying for until it is built, the new rules will apply unless you receive the mortgage funds before December 31, 2012. You need to make sure you know when the condo construction will be completed to know whether the new rules will apply.
If you have been pre-approved for a mortgage, but will not sign an agreement of purchase and sale and make a mortgage application before July 9, the new rules will apply to your mortgage.
If you are planning on renewing your mortgage or switching your mortgage to a different lender, you won’t be affected by these changes as long as no new funds are added to the mortgage.
If you are planning on being active in the real estate market or refinancing your mortgage in the next couple of weeks, or have already begun the process, make sure you know if the new rules apply to your situation, and if so how the new rules will affect your plans going forward.