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Tuesday, August 30th, 2016

Changing Mortgage Regulations Present Challenges to First-time Homebuyers

Changing Mortgage Regulations Present Challenges to First-time Homebuyers

On July 1 2012, new mortgage regulations came into affect in Canada. The purpose of these rules was to cool the hot Canadian housing market, as well as stem a housing bubble and high levels of household debt. The biggest change that potential homeowners should be concerned about is the change in the maximum amortization period. Though, those refinancing their homes will also be affected by the new regulations, as the maximum amount for home equity loans has been decreased.

Despite the far reaching impact of the new rules, most Canadians are unaware of them. These rules will affect people’s ability to buy new homes by making it more difficult for them to qualify for mortgages. Many individuals who were aware of the coming changes sped up the purchase of their homes, so that they could finance their mortgages over a longer period of time, make lower monthly payments and be able to afford the purchase of a more expensive home.

The big change resulting from the new rules is a decrease in the maximum amortization period. The maximum amortization period on a mortgage has been decreased from 30 years to 25. This forces homeowners to pay off their mortgages more quickly. The upside of this is that homeowners will pay less total interest over the life of their mortgage, but the downside is that higher monthly payments are now required to pay off their mortgages in a fewer number of years.

As far as those interested in refinancing their homes, home equity loans are now limited to 80% of a home’s value, down from the previous 85%. Due to this, an individual who borrowed against the same home one year ago would not be able to borrow as large of an amount today. For example, a $500,000 home one year ago would have allowed a $425,000 (500k * 85%) home equity loan. But the same home, if borrowed against today, could only permit a $400,000 (500k * 80%) home equity loan.

The new rules are not retroactive. This means that individuals who qualified for 30 year mortgages before the new regulations took affect  do not have to refinance their home with a 25 years term.

These new regulations only apply to insured mortgages. According to the Canadian Housing and Mortgage Corporation, all homes with less than 20% equity require mortgage insurance. And only home valued at less than $1 million qualify for insurance.

Policy makers see these new regulations as a necessary evil. It is particularly aimed at the hot housing markets in both Vancouver and Toronto, where condominium developers continue to build and home prices continue to increase. Despite the increase in both supply and prices, rent has not been increasing nearly as fast. Homes have also become increasingly unaffordable. Both of these facts indicate the possibility of a bubble in this sector.

According to economists, the effect of these rules could lower the value of homes in Canada, as demand falls amid affordability concerns but supply remains steady. Regardless of the far-reaching effects of these new regulations, many potential new home buyers are unaware of the changes.

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