On February 16, 2010, the Federal Goverment announced changes to the underwriting process of Goverment-backed Mortgages. The 3 Primary changes that were made are as follows:
• Require that a borrower qualify at a five-year fixed mortgage rate even if he/she chooses a mortgage with a lower interest rate and shorter term. Currently, borrowers qualify at a three-year term;
• Lower the maximum amount homeowners can withdraw in refinancing their mortgages to 90% from 95% of the value of their homes; and
• Increase the maximum down payment to 20% from 5% on non-owner occupied properties purchased for speculation.
The above changes were made in anticipation of strengthening the Mortgage industry by allowing for a cushion should property values decline, or provided interest rates begin to increase upon a rise in the economy. This means that should property values decline, Canadians won’t be left with Mortgages that are higher than the value of their home. It also means that if Canadians are approved at a higher rate, they won’t be left unexpectedly unable to meet their mortgage payment obligation.
These changes to the criteria follow changes previously set out by the Goverment back in October 2008 where they reduced the minimum downpayment from zero percent to 5 percent, reduced the maximum amount from 40 years to 35 years and established a more stringent minimum beacon score for financing in an effort to stabilize the Mortgage Industry to avoid the same fate of the United States.
What is a Goverment-backed Mortgage?
A Goverment-backed Mortgage, also called an insured Mortgage, is whereby the purchaser is buying a house with less than the standard 20% downpayment. Canadians can purchase a property with as little as 5 percent down through CMHC, an insurer. CMHC will insure the Financial Institution in the event of default, for any losses that may occur. In short, CMHC allows for Canadians to purchase a home with as little as 5 percent down, and insures the Financial Institution so that they are protected and able to approve the Mortgage funding.
How do these changes affect me?
The good news is that you can still purchase a home for principal residence with as little as 5 percent down. How it works now is that Canadians can be approved for a Mortgage based on the 3-year Mortgage rate, which right now is at an all time low. What this does is that it makes your mortgage payment lower, and more affordable. However, in 3-years time when you’re up for renewal, Mortgage rates may have doubled, making payments no longer affordable for Canadians. This new change will now have Canadians originally approved at the highest Mortgage rate, or that of a 5-year, to ensure that payments remain affordable after maturity.
Canadians looking to purchase an investment property, for the purposes of speculating that the housing market will continue to grow, they will now be required to put down a 20% downpayment. What this means is that Canadians are no longer able to purchase an investment property for purposes of speculation with only 5 percent down.
One of the biggest changes that will affect a lot of Canadian home owners is the amount that can be withdrawn from their property. Currently, Canadians can withdraw up to 95 percent of their property value for purposes of refinance. Under the new change, Canadians can only withdraw up to 90 percent. This will affect anyone looking to withdraw equity from their property to consolidate debt, home renovations, or other projects, less their existing Mortgage.
The above changes will not take effect until April 19, 2010. For anyone that would like more information on how these changes will affect them, or to talk to me about refinancing your property prior to April 19, 2010, please contact our office at 416-542-2522.
Mark Mcdonald, AMP
Loan Officer
