What the new mortgage rules say and what they mean for homebuyers

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by Farhaneh Haque

On June 21, Canadians woke up to an announcement by the Department of Finance, which changed the rules for mortgages with loan-to-value ratio greater than 80% and took effect on July 9 (details are contained here: changes to High Ratio Insured Mortgages). In his statement, Minister Jim Flaherty expressed that these guidelines are intended to help keep the Canadian housing market strong and to help households avoid overextending themselves on debt.

Changes to high-ratio mortgages include:

  • Reduced maximum amortization period from 30 to 25 years
  • Reduced maximum Loan-to-Value (LTV) for refinance transactions from 85% to 80%
  • Purchase price must be less than $1 million
  • Tightened gross debt & total debt ratio calculations

So what does this mean for the average Canadian homebuyer or owner? Let’s review in sequence.

Reduced Amortization:

The shortened amortization of 25 years (from 30 years) will impact potential buyers’ affordability in roughly the same way as a 0.9% increase in mortgage interest rates. Let’s compare:

Mortgage Amount
Interest Rate
Term / Amortization
Monthly Payment
$350,000
3.29%
5 years / 25 years
$1,708.88
$350,000
4.19%
5 years / 30 years
$1,702.15

Looking at it from another viewpoint, when qualifying for a mortgage, the monthly mortgage payment determines, in large part, the purchase price that you may qualify for. Since the amortization period contributes to the monthly payment calculation, the shortened amortization translates to a 9% decrease in a potential buyer’s buying capacity as shown below:

30 Year Amortization
25 Year Amortization
Gross Household Income
$75,000
$75,000
Down Payment
$50,000
$50,000
Annual Property Expenses
$4,960
$4,960
Other household debt
$0
$0
Mortgage Term / Interest Rate
5 year / 3.29%
5 year / 3.29%
Maximum Purchase Price
$413,766
$374,970

With the reduced amortization, a potential buyer with less than 20% down will seek out properties that are slightly cheaper and potential sellers wishing to sell their property quickly will have to price their properties aggressively. Consider that owning a home means additional payments on top of just the mortgage payments (property tax, home insurance, utilities etc.). Thus, reigning in the borrowing capacity through the shortened amortization, especially for first-time buyers, will make home ownership debt more manageable.

Reduced Loan-to-Value for Refinance Transactions

You may have heard the expression “using your home as an ATM”. It refers to the fears that Canadians are using the equity in their homes to live beyond their means and have come to rely on debt as a means to keep up their lifestyles.

The reduction to 80% (previously 85%) means that as a homeowner, you will now retain an additional $20,000 in equity in your $400,000 home. The plus is that a loan-to-value ≤ 80% means you save approximately $5900 in high ratio mortgage insurance premiums (based on a $400,000 property value).

The downside and something to consider: as a home owner if you owe, for example, $20,000 in debt outside of your mortgage and are paying 21% in interest, the 80% maximum limit could mean that you are paying an extra $3600+/- annually in interest (since you can’t roll it into your mortgage based on current interest rates).

Another area where this may impact Canadians is home renovations – since many homeowners rely on refinancing their mortgage, or taking out a home equity line of credit to pay for major home renovations such as: kitchen upgrades, bathroom redo or basement renovations.

With this in mind, we will have to become better at managing our debt and planning for major spending by saving ahead or paying down our mortgages faster before we borrow again.

Purchase Price for High-Ratio Insured Mortgages to be less than $1MM

In my opinion, first-time buyers with a modest down payment should always cap their purchase price at less than $1MM – or, perhaps even lower. While the low interest rates have made it financially comfortable and affordable to purchase more expensive properties, we need to prepare ourselves for interest rates that are perhaps 2% or 3% higher. Let’s look at an example:

Mortgage Amount
Interest Rate
Term / Amortization
Monthly Payment
$350,000
3.29%
5 years / 25 years
$1,708.88
$350,000
4.29%
5 years / 25 years
$1896.51
$350,000
5.29%
5 years / 25 years
$2093.58
$350,000
6.29%
5 years / 25 years
$2300.51

Effectively, monthly mortgage payments grow by 35% with a 3% increase in mortgage interest rates, which no doubt can be strenuous on anybody’s budget.

Tightened Gross & Total Debt Servicing Ratio Calculations

Gross Debt Servicing ratio (GDS) measures the percentage of the borrower’s gross income that will be used for monthly payments of principal, interest, taxes, heating costs and condominium fees, while Total Debt Servicing ratio (TDS) measures the percentage of gross income needed to cover monthly payments for housing and all other debts and financing obligations.

Most people will not feel any effect from this, mainly because banks have generally held high-ratio deals to strict internal GDS and TDS guidelines, so this change, I feel, will go unnoticed.

Since the announcement, there has been a lot of debate about what this will mean for home values, which will only become evident as the market absorbs the changes. In the meantime, serious buyers can look to their network of professionals (real estate agent, mortgage specialist, contractor) to help navigate through the current market, and serious sellers need to remember their home is worth what someone is willing to pay for it.

Would like to hear what you think about this; join our conversation at TD Helps with Home Ownership.


About the Author

Farhaneh Haque is the Director of Mortgage Advice with TD Canada Trust, a leader in residential real estate mortgages and home equity lines of credit. With over 18 years of lending experience, she is entrusted with the responsibility of offering mortgage advice to help Canadians make informed decisions about home financing and ownership. 

Farhaneh and her team draw upon research commissioned by TD Canada Trust, which reveals consumer attitudes and behavior related to home ownership such as choosing and buying a first home, renovating and greening a home, as well as understanding gender, regional and other demographic preferences. They also have access to proprietary research from TD Economics on topics such as Canadian interest rate forecasts and Canadian housing market insights 

In her personal time, Farhaneh is an active member of community groups promoting youth education; in particular helping high school students in securing funding to pursue post secondary education.

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