New Mortgage Down Payment Rule

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New Mortgage Down Payment Rule

On December 11, 2015 the Finance Minister Bill Morneau announced changes to the rules related on how much mortgage down payment for government-backed mortgage insurance the consumer must provide. As stated in the Department of Finance Canada’s press release, the purpose of new mortgage down payment rule changes are “to contain risks in the housing market, reduce taxpayer exposure, and support long-term stability.”

new mortgage down payment rule
image courtesy of Macleans.ca

The new mortgage down payment rule comes into effect on February 15, 2016 for home purchase prices above $500,000 with changes to the minimum down payment amount a home buyer can provide. Up to a home purchase price of $500,000 the 5% mortgage down payment rule is unchanged. Any amount above and beyond $500,000 the borrower must now provide 10% of the above and beyond amount.

Here’s how to calculate how much mortgage down payment you will need if the purchase price is more than $500,000.

Example

Before the mortgage down payment rule becomes effective

Purchase price: $750,000 x 5% = $37,500

Mortgage amount: $750,000 – $37,500 = $712,500

After the mortgage down payment rule becomes effective

Purchase price: $750,000

$500,000 x 5% = $25,000

$250,000 x 10% = $25,000

Total down payment you will need is $25,000 + $25,000 = $50,000

Mortgage amount: $750,000 – $50,000 = $700,000

 

For the above example and comparable, after February 15, 2016 when the new mortgage down payment rules come into effect the borrower will need to have an additional $12,500 to pay towards the down payment.

new mortgage down payment rule

Curious to know how much the mortgage payment’s will be? Head over to our mortgage calculator page. You can select a mortgage rate from any of our mortgage terms on our mortgage rates page to use in the mortgage calculator.

Contact us for more complex calculations and for any questions you may have regarding the new mortgage down payment rule or any other mortgage related questions. We’re here to help!

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Beginners Guide to Getting a Mortgage

Beginners Guide to Getting a Mortgage

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A beginner’s guide to getting a mortgage

In this beginner’s guide to getting a mortgage we will take you through the main steps of applying for a mortgage application. This beginners guide to getting a mortgage will cover the main points that will help you better understand what is involved when getting a mortgage in Canada.

Beginners Guide to Getting a Mortgage

A beginner’s guide to getting a mortgage STEP 1 – find a mortgage professional

We strongly recommend you working with a Mortgage Broker or Agent. They are licensed with their respective Provincial Governments and have met all the required educational standards to become a licensed mortgage broker or agent.

There are many advantages to acquiring the services of a mortgage broker or agent. To name a few;

  1. They work for their client’s best interest,
  2. Mortgages are what they do day-in, day-out,
  3. Because a mortgage broker or agent is not working for any of the lenders there is no conflict of interest for them towards pushing you to one lender or the other,
  4. They constantly stay up to date with the real estate financing world by participating in continuing educational courses and workshops.

A beginner’s guide to getting a mortgage STEP 2 – ‘checks and balances’

Buying real estate is, for most people, the largest single investment they will ever make, and because of this, getting a mortgage should not be taken lightly. Every person thinking about buying their own home whether now or in the future should start planning for the inevitable. What is the inevitable you ask? It is being able to show the lender that you are able to pay them back on a timely manner as agreed upon based on your credit strength and income. And how do you show this in practicality? Lenders such as Chartered Banks, Trust Companies, and Credit Unions follow Government underwriting guidelines, and as well their own internal policy’s, all designed to test how strong or week someone’s personal financial strength is in comparison to their debt level’s to be able to pay back the mortgage loan. To do this the lenders have certain requirements and they ask for information from the borrower when considering whether to approve them for a mortgage loan or not. They want to make sure at minimum the borrower has:

  • Enough income to pay back the monthly principle and interest of the loan
  • At least 5% down payment or more; you can even use gifted money from immediate family
  • A satisfactory credit history and a healthy credit score
  • We also recommend checking your credit report and score regularly, perhaps every year or two at Equifax and Transunion. This is great preparation for when you are ready to apply for a mortgage by making sure there are no discrepancies or fraud activity in your accounts.

Beginners Guide to Getting a Mortgage

That means from now you can start putting aside money each month in your bank account for your down payment and making sure that you have a steady job or income coming in to show the lender that you can afford to pay back the loan. As well, you want to make sure that you are paying back your debt on time, and on a monthly basis, and not be late making those payments.

A beginner’s guide to getting a mortgage STEP 3 – Consult with your Mortgage Broker or Mortgage Agent

Beginners Guide to Getting a Mortgage

Now that you have done your checks and balances, you can contact your Mortgage Broker or Mortgage Agent and consult with her or him about your current financial strength and debt obligations. They will ask you to fill out their mortgage application so that they can better assess your financial health and credit worthiness/readiness to apply for a mortgage. Your mortgage professional will, after reviewing your financial and debt history, ask further questions and give you advice on what steps to take next; whether to continue with your mortgage application or to wait until other matters are taken care of to strengthen and improve your chances of getting approved for a mortgage.

 

This post and its content, we hope, has provided you with the basic information you need when considering applying for a mortgage. Don’t hesitate to Contact Us with your questions, and if you would like to start the mortgage application process. As well, we invite you to share any thoughts you may have about the mortgage application and approval process below in the comments section.

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Canadian Mortgage Rules

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New Canadian Mortgage Rules

It has been several years now since the Government of Canada decided to take steps in tightening certain Canadian mortgage rules and guidelines for Chartered Banks and other lending institutions such as Trust companies and Credit Unions so that the new Canadian mortgage rules would help cool the consumers hunger and appetite for debt accumulation, especially buying real estate.

Since back in February of 2010 until now, the Canadian Government has implemented multiple rules and tightening of existing regulations and we wanted to summarize them here for your quick reference. new canadian mortgage rules

– All borrowers must meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.

– Canadians can withdraw equity from their homes in refinancing their mortgages up to 90 per cent of the appraised home value from 95 per cent. This will help ensure home ownership is a more effective way to save.

– When purchasing real estate other than one to live in, Canadians are required to have at least a minimum down payment of 20 per cent. This measure is to reduce the risk involved in investment properties based on market speculation that property values can go up for R.O.I. Return On Investment purposes.

– The maximum amortization for insured mortgages has come down from 30 to 25 years, and many lenders have adopted this policy even for non-insured mortgages.

– Borrowers applying for an insured variable rate mortgage must be approved using the Bank of Canada 5 year bench mark interest rate. This means that the borrower can no longer be approved with the discounted variable rate that they are applying for, but must be risk tested by seeing if they can be approved if the variable interest rate was to go up to the 5 year bench mark rate, which is always higher than the discounted variable rates that the banks promote. If the debt calculation ratios work out and are within aloud parameters, than the borrower will be approved the variable mortgage and will receive the advertised discounted rate.

– Further to the above new rule, the five-year variable rate conventional mortgages or conventional mortgages with terms less than five years now require that the borrower qualify based on the greater of the Bank of Canada five-year benchmark rate or the lenders mortgage contract rate applicable to the term chosen. For terms of five years or more, the qualifying rate is the contract rate.

– As well, the underwriting process and debt calculations in approving a borrower for a mortgage has become more strenuous to insure that the borrower has the strength and credibility to be able to pay back the loan amount.

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What is mortgage loan insurance

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Mortgage Loan Insurance

Source: Government of Canada Department of Finance

Mortgage loan insurance (which is sometimes called mortgage default insurance) is a credit risk management tool that protects lenders from losses on mortgage loans. If a borrower defaults on a mortgage, and the proceeds from the foreclosure of the property are insufficient to cover the resulting loss, the lender submits a claim to the mortgage insurer to recover its losses.

The law requires federally regulated lenders to obtain mortgage insurance on loans in which the homebuyer has made a down payment of less than 20 per cent of the purchase price (also called high loan-to-value mortgages). The homebuyer pays the premiums for this insurance, which protects the lender if the homebuyer defaults.

The Government backs insured residential mortgages in Canada. It is responsible for the obligations of Canada Mortgage and Housing Corporation (CMHC) as it is an agent Crown corporation. In order for private mortgage insurers to compete with CMHC, the Government backs private mortgage insurers’ obligations to lenders, subject to a deductible equal to 10 per cent of the original principal amount of the loan.

Since 2008, the Government has taken measured steps to strengthen the minimum standards for government-backed insured mortgages, including:

  • Requiring a minimum down payment of five per cent for owner-occupied properties and 20 per cent for speculative properties.
  • Limiting the maximum amortization period to 30 years.
  • Lowering the maximum amount Canadians can withdraw in refinancing to 85 per cent of the value of their homes.
  • Requiring that borrowers meet the standards for a five-year fixed-rate mortgage even if they choose a mortgage with a lower interest rate and shorter term.
  • Withdrawing Government insurance backing on lines of credit secured by homes.

These standards apply for mortgages on residential property with four units or less. They do not affect multi-unit buildings with five units or more.

 

Further Measures have been initiated by the Federal Government

The Government announced further changes to the standards for government-backed insured mortgages. These measures would apply to new high loan-to-value mortgages backed by the Government.

Limit the Maximum Amortization Period to 25 Years

The amortization period is the length of time it will take to pay off the entire mortgage loan. It is usually much longer than the term of the mortgage. A typical mortgage in Canada may have a term of five years or less during which a specific fixed or variable interest rate will apply, and the mortgage can be renewed at the end of the term.

The measure announced today will reduce the maximum amortization period from 30 years to 25 years for high loan-to-value mortgages, which are backed by government insurance. (Banks will still be able to offer 30-year amortization periods on low ratio—20 per cent or more down payment—mortgages, if they so choose.). For any given mortgage loan, a lower amortization period would result in a moderate increase in the monthly payment along with a significant reduction in the total interest paid over the amortization period. The following table illustrates the benefit of reducing the amortization period from 30 years to 25 years for a mortgage loan of $350,000.1

Interest Rate 30-Year Amortization—Monthly Payment 25-Year Amortization—Monthly Payment Difference in Monthly Payment—
25-Year vs. 30-Year Amortization
Interest Savings—25-Year vs. 30-Year Amortization
3 per cent $1,472 $1,656 $184 $33,052
4 per cent $1,664 $1,841 $177 $46,832
5 per cent $1,868 $2,036 $168 $61,765

 

Lower the Maximum Refinancing Amount to 80 Per Cent of the Loan-to-Value Ratio

Borrowers can refinance their mortgage and increase the amount of the loan secured against their home. The measure announced today will reduce the limit on refinancing from 85 per cent to 80 per cent of the value of the home. Reducing the maximum refinancing amount to 80 per cent follows the change from 90 per cent to 85 per cent in March 2011. Reducing the maximum loan-to-value ratio on refinancing will encourage Canadians to keep equity in their home and save through home ownership.

As an illustration, for a home valued at $350,000, refinancing at 85 per cent would allow the homeowner to access up to $297,500, whereas refinancing at 80 per cent would allow the homeowner to access up to $280,000. The lower refinancing limit means homeowners will keep an additional $17,500 in the equity of their home and at the same time save up to $5,200 in insurance premiums.

Limit the Gross Debt Service Ratio to 39 Per Cent and Total Debt Service Ratio to 44 Per Cent

There are two ratios commonly used to measure the risk associated with household debt: the gross debt service (GDS) ratio and the total debt service (TDS) ratio. The GDS ratio is the share of the borrower’s gross household income that is needed to pay for home-related expenses, such as mortgage payments, property taxes and heating expenses. The TDS ratio is the share of the borrower’s gross income that is needed to pay for home-related expenses and all other debt obligations.

Lenders must review a borrower’s debt service ratios before granting a mortgage loan. In 2008, the Government announced a 45 per cent TDS limit as part of the adjustments to the rules for government-backed insured mortgages. The measure announced today will limit the GDS ratio to 39 per cent and lower the maximum TDS ratio to 44 per cent. Setting a GDS limit and lowering the TDS limit will help prevent Canadian households from overextending themselves and reduce the number of financially vulnerable households.

Limit the Availability of Government-Backed Insured Mortgages to Homes With a Purchase Price of Less Than $1 Million

The measure announced today will establish that government-backed mortgage insurance is only available for a new high loan-to-value mortgage if the home purchase price is under $1 million.

Establishing a maximum allowable price will ensure that government-backed mortgage insurance operates the way it was originally intended: to help working families and first-time homebuyers. According to the Canadian Real Estate Association, the national average price (based on Multiple Listing Service sales activity) for a home sold in May 2012 was $375,605. This measure is expected to have a negligible impact on working families and first-time homebuyers as the vast majority of these borrowers purchase properties priced below the threshold. Borrowers purchasing homes priced at or above the maximum allowable price would require a down payment of at least 20 per cent.

Implementation of the New Framework started on July 9, 2012.

 


1 The mortgage loan amount used in the illustrative example represents approximately the size of the mortgage loan needed for an average house in Canada. According to the Canadian Real Estate Association, the national average price (based on Multiple Listing Service sales activity) for a home sold in May 2012 was $375,605.

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