In recent history, it seems that the mortgage rules have been changing every couple of years. I remember back in 2003 when I purchased my first house that the maximum mortgage amortization was 25 years. Then, someone came up with the great idea to make housing more “affordable” by increasing mortgage amortization to 30 years, then to 35 years, finally to 40 years.  Over the past few years, they started reverting back amortization bring it back down to more reasonable levels.

What exactly is CMHC? It’s mortgage insurance for clients with less than 20% down payment. Even though the client pays the premium, it doesn’t insure the client, it insures the bank in case of client default. CMHC basically takes the risk away from the bank for backing a high loan to value ratio mortgage.

RelatedHow CMHC Works

The Mortgage Rule Changes and Implications

Reduced Amortization. Perhaps the biggest change in the mortgage rules is the reduction in maximum amortization from the previous 30 years to 25 years. What does this mean?  Simply that mortgage payments just got a bit more expensive for new home buyers.   For example, a $200k mortgage @ 3.5% over 30 years is $895/month but over 25 years, the payments are about $1,000/month.  However, in the big picture, more of the payment will go towards the principal thus less interest paid over the term of the mortgage.

Reduced Refinancing Amount.  For existing home owners looking to tap into their home equity, the maximum loan to value has been decreased from 85% to 80%.  What does this mean?  Simply that if you have a $100,000 home that is paid off but looking to obtain a home equity line of credit, you would eligible to borrow up to $80,000 instead of $85,000.  Having this rule also implicitly saves homeowners money, as before, any amount borrowed greater than 80% of equity available required a CMHC fee.

Changes to Qualfying Ratios. When applying for a mortgage, the bank will run a couple of debt ratios to see if you qualify or if the debt burden is too much.  The Gross Debt Service Ratio (GDS), which is a ratio of gross income to housing costs, now must be less than 39%.  The Total Debt Service Ratio (TDS), which is the ratio of gross income to housing costs plus other debts, must be less than 44%.  I don’t see this being an issue as these ratios were more restrictive in the past (see article below).

Related: Mortgage Qualifying Debt Ratios

No More CMHC for Million Dollar Homes.  When the new rules come into affect (July 9, 2012), houses that sell for over $1,000,000 will not longer qualify for CMHC insurance.  What does this mean?   Basically that any house in that price range will require at least 20% cash as a down payment.  I can see this slowing down more expensive markets like Vancouver and Toronto.

Final Thoughts

What do I think of the changes?  Personally, I like them!  Even though it’s a bit of hand holding by the government, the fact of the matter is that most people do not understand what they can reasonably afford.  Most think that if the bank will give it to them, then it must be ok.  These changes basically bring the mortgage rules in line with what they were for many years in the past.

Back to you , what do you think of the new mortgage rules?

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  1. Steve on June 25, 2012 at 10:20 am

    I agree that going with what the bank says you can afford is foolhardy.

    If the bank loans you money for a home you can’t afford who takes the risk of the default? Not the bank. You got mortgage insurance, if you default, they file an insurance claim. Sounds like the mortgage insurance company takes the risk? Not really. If your mortgage insurance was provided by the CMHC then it’s the government coffers, and thus you, the tax payer taking on the risk of all those mortgages that should never have been approved.

  2. Downtown Brian on June 25, 2012 at 10:42 am

    Good, but too little too late.

  3. CMA on June 25, 2012 at 11:18 am

    Last two times they (Govt.) changed the rule but without having much impact on what they wanted to achieve.

    This time – it is more direct and stricter. We can expect some direct impact.

    The question is that the government is trying to teach us fiscal prudence, who is keeping a tab on the government?

  4. jbearr33 on June 25, 2012 at 12:09 pm

    I agree that these rules will help people over the long-term. Mortgage brokers sure don’t seem to like them though. It will impact housing purchases for a little while, but then the market should be driven more by fundamentals than by speculation and high debt.

  5. Nancy on June 25, 2012 at 12:44 pm

    I like the rules. I heard the other day that the next generous of young grads will not likely be buying homes because of debt and the prices in the current market. This makes me sad, but I think these changes are necessary to bring spending back in line with earnings. Like you said in your post, “Most think that if the bank will give it to them, then it must be ok.” It’s time for a lesson on what’s ok.

  6. Sarlock on June 25, 2012 at 1:41 pm

    It’s not hand holding at all. This is to protect the CMHC which is ultimately backed by taxpayers.
    If you want to borrow outside of the CMHC, you just have to have the requisite funds to be able to do that. If you really want to stretch yourself, there are still plenty of private lenders willing to help you out… for a significant fee/interest. The CMHC was used as a method to offload the risk (and cost) to the government/taxpayer while the banks profited from the risky loan behaviour. Now this avenue isn’t available any more, the risk and cost goes back to the lender and loan holder.

  7. Steve @ Grocery Alerts Canada on June 25, 2012 at 2:12 pm

    Locally in Victoria, BC the last time a change was made the average sale price went down.

    Many of our banks have made risky investments with housing but Canadians need to realize that homes in Vancouver go for over $1 million quite easily. Do an MLS search and it would shock you how much a house goes for compared to where you live.

  8. JM on June 25, 2012 at 3:15 pm

    The changes seem to make sense and it’s now back where we were before with the amortization period. It’s certainly provide less flexibility but it’s better to apply this before any major rate hikes to protect people from getting surprised later in a few years.

  9. Elbyron on June 25, 2012 at 3:16 pm

    It doesn’t seem like they really did much in terms of stopping people from buying more than they can afford. In fact, they might have even made it worse. Consider the example of $895/month over 30 years now being offered as $1000/month over 25 years. When I first read through the article, I thought: “that’s good, now people who can’t afford $1000/month won’t be buying such an expensive house”. But then I read about the increases to qualifying ratios. So now, even though the banks will have to use $1000/month for calculating the GDS and TDS, the increased maximum ratios mean that they will still be able to conclude that the person CAN afford the $1000/month payment. And the banks will be happy to show the customer that this higher payment is within the government’s recommended ratios! So the guy lacking any financial skills who depends on and trusts the banks will still buy the same house and think he can afford it. The overspending problem didn’t really get fixed – though the real problem is the lack of financial education; setting limits on how much you can overspend doesn’t make people any more responsible or knowledgeable.

  10. Koala on June 25, 2012 at 4:06 pm

    Are the changes to the TDS and GDS only for CMHC mortgages as well, or are those rules applied to all mortgages? Were there any changes to these ratios between the 2007 article and the current changes?

  11. Infinity on June 25, 2012 at 5:39 pm

    Why is it that a neo-con government, like Harper’s Reform party, thinks it has to pass innumerable laws to police how people buy houses? Those on the right want less government control, not more. But just like the Mike Harris PCs in Ontario (who are now all cabinet ministers with Harper), the neo-cons love heavy-handed fascist control.

    As a free citizen in a democratic society, I’ll decide how long I want my amortization to be and how much equity I want to use. If I make the wrong decisions, I pay. Are Flaherty and Harper going to choose where I live too? Oh yeah, if I need the EI I’ve paid into for the last 25 years, they’ll tell me where I have to work too. Are they also going to dictate fixed or variable for me? Just because we could amortize over 40 years and use 95% equity doesn’t mean we will. Like everything else they do, the Reform party is completely insane.

  12. Canadianbudgetbinder on June 25, 2012 at 8:11 pm

    I learned that people are going to do what they want no matter the consequences. Sometimes people like to do things their way even if it may be the hard way. Will this change make a difference, maybe, but until people stop spending more than they earn on everything in life they will have to live with debt hanging over their shoulders and the consequences that come with it.

  13. scovidiu on June 25, 2012 at 10:55 pm

    The Government should stop insuring banks risks with taxpayers money. It’s just a transfer of money from the working poor to the shareholder rich. CMHC should be eliminated.

  14. Goldberg on June 26, 2012 at 9:41 am

    Good changes. I support.

    Most people aren’t financially smart. They can’t think further than the weekend, let alone how their finances will be in 25 years.

  15. Steve on June 26, 2012 at 10:23 am

    @ Infinity

    “I’ll decide how long I want my amortization to be and how much equity I want to use. If I make the wrong decisions, I pay.”

    That’s the whole point. YOU DON’T PAY. If the CMHC insured the loan, the tax payer pays for your wrong decision.

    You can still hang yourself with a 40 year, interest only mortgage if you wish, you just won’t be doing it on the tax payers bill. You’ll need a private insurer to fashion your noose for you.

    All the government has done is shift the risk on those mortgages to private lenders/insurers and away from public coffers.

  16. Manette @ Barbara Friedberg Personal Finance on June 26, 2012 at 11:13 am

    Looking at the positive side, the rule may be good beccause borrowers will be able to pay off the loan in shorter period and there will be less interest to pay. However, shorter loan term means higher amortization. Can home borrowers afford the higher monthly amortization for the home they have been dreaming of? If hte answer is no, the rule could obviously result to lower number of houses sold in the coming years.

  17. ridiculous on June 26, 2012 at 12:06 pm

    I think the changes are good but still only get us half of the way there. Before 2001, the max insurable value under the cmhc was @200-300k depending on what city you lived in. The insurance was there so that less fortunate families could get a house. There is nothing average about taking out a $999,999 loan, and I don’t think even the average house price should be insured by the cmhc. 25% down for most, market interest rates and 25 year amorts will be painful at first but will eventually sort things out. A stable market should be the goal, not to “avoid falling house prices”. Houses should be easy to buy if you are a responsible saver and hard to buy if you aren’t.

    Oh, also @ Infinity: “Just because we could amortize over 40 years and use 95% equity doesn’t mean we will”. This is the opposite of correct. I am also a free citizen in a free society, except I an a net lender at the moment. I should have the choice as to whether or not the banks lend my money to you at 40 years, but I cant. The government decides how much the banks can lend and will pay the banks more of my money if you don’t pay your loan. The free market figured out that 25/25 mortgages worked. The socialist government moving away from that is what broke the capitalist system, not the other way around.

  18. My Own Advisor on June 27, 2012 at 10:44 am

    Great post. I like the rules.

    These changes are necessary.


  19. Rick on July 9, 2012 at 10:48 am

    I have mixed feelings about this, I guess we will wait and see what the outcome will be.

  20. Sarah on November 28, 2013 at 12:30 pm

    we are feeling all the new mortgage rules heavily in our situation. We have three rental properties and our own home. We generate more rental income now than we did three years ago, we just sold our primary residence, moved to another province with a higher wage and tired to buy a house that was less expensive than the one we sold. We were told it was a no go without over 25% down. I now have to rent a house for $500 more a month than the mortgage payment would have been. Why? Because banks and mortgage companies cannot seem to decide on their own whether someone qualifies and the government feels the need to poke their nose in and “help” How oculd we afford it before, but now we somehow became high risk?

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