Federal Government Announces Changes To Mortgage Law

Effective March 18, 2011 the new rules for obtaining a mortgage will differ from current mortgage law.  There will be a limit to a maximum of 30 year amortization period rather than the current 35 years. The amortization period is the life of the mortgage and should not be confused with the term, which can range anywhere from a few months to more typically 5 years. That being said the new changes will remove qualified individuals from the market place or put a mark in the purchasing power of many buyers. As the chart below describes the increase in monthly payments, this in effect raises your debt service ratio, which banks analyze to determine your suitability for borrowing, then which that in turn decreases your maximum allowable mortgage amount.

Furthermore, changes are also being made to the maximum allowable re-finance amount. Borrowers can re-finance and increase the amount of their loan against their home. The changes announced on January 17th will limit the amount of re-finance available from 90 percent to 85 percent of the value of the home.

As an illustration, for a home appraised (your bank will send an appraiser out when you look to re-finance) at $200,000, re-financing at 90 percent would allow the home-owner to withdraw $180,000 worth of equity. With the new change being an 85 percent maximum re-finance, a home-owner may access $170,000 worth of equity in place.

Last of the changes the government made is that mortgage insurance to banks will no longer be provided for home equity line of credits - HELOC's. Tax payers will now be relieved of this duty and it is up to the financial institution carrying the HELOC to absorbed the financial loss incurred on home-owners who default on the HELOC. Previously mortgage insurance in Canada covered the default payment on these borrowing models, now the insurance is in place to only cover any losses incurred by the lack of equity in a homes principal mortgage amount. 

The adjustments for the maximum amortization and maximum re-finance amount will come in effect March 18, 2011. The withdrawal of government insurance backing HELOC's will come in effect April 18, 2011.