Mortgage Rules

Imminent changes to residential mortgage rules in Canada will affect the majority of homebuyers, including those entering the market for the very first time, new Canadians and seasoned investors. The federal government announced the changes at the beginning of August, with the new regulations going into effect October 15. The three most significant are: the end of the 40-year amortization; the requirement for borrowers to have a minimum credit score of 620; and the end of zero-down mortgages. “I think there are two reasons why we’re seeing these changes,” says Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals (CAAMP). “First, the federal government was looking at its exposure [to risk] and that of the Canadian taxpayer. Second, I think they were looking at what’s going on in the United States.”

When a homeowner defaults on a mortgage and the mortgage insurer is not able to cover the costs, the Government of Canada is left holding the bag. Says Murphy, “You have a lender – a bank or credit union. If you put less than 20% down, that lender has to have mortgage insurance. The government then provides a guarantee to the mortgage insurer.”

With these new regulations, the government is telling mortgage insurers that only mortgages meeting the above-mentioned new criteria will be backed.

Amortization

Although the 40-year amortization option is gone, 30- and 35-year amortizations are still available and growing in popularity. “These will probably become the norm,” Murphy says. “Between the fall of 2006 and the fall of 2007, 37% of all mortgages taken out had an amortization of more than 25 years. [This year] that number will be much higher.”

Murphy believes there are a variety of reasons for this. For first-time buyers, the issue is affordability. They are willing to pay more in interest over the term of the mortgage as long as it gets them into a bigger or better home than they could afford under more traditional 25-year amortizations. Paying back a mortgage over 35 years means paying less per month. This also allows first-timers the opportunity to get into the housing market sooner.

But just because you start with a 35-year mortgage, doesn’t mean you can’t make changes later on. “Most people will never be in that mortgage for the full 30 or 35 years,” Murphy says. “They may get a promotion or an inheritance and pay [it] down.”

Longer amortization periods are not just for first-time buyers. “We have people who have equity in their homes and for whatever reasons want a longer amortization,” Murphy says, “They may want to put money into investments or want to do other things with it.” If you have a down payment of 20% or more, no mortgage insurance is needed. Nonetheless, finding a lender who will offer a 40-year package won’t be easy now. “There’s nothing that prevents a lender from offering a 40-year amortization, but it will be likely difficult to find,” Murphy says.

Zero down

The nothing-down mortgage (available for the past couple of years) is also gone. The new standard is the old standard – 5% down, minimum. “This change will have a bigger impact on the market, we believe," Murphy says, "particularly for first-time buyers and particularly in a place like the GTA, where housing costs are higher.” The good news is that the government will allow buyers to borrow that 5% from any lender or bank.

Credit score

Although a buyer’s credit score was always of concern to the lender, the government never got involved at this end of the transaction. That will change on October 15, when the government will require the buyer (or one of the buyers, if it’s a joint purchase) to have a minimum credit score of 620.

This new guideline may prove to be a problem for immigrants. “We have expressed some concern about this, especially when it comes to new Canadians, who may have a zero credit rating because they have no credit history,” Murphy says. “So how are they supposed to qualify?” Murphy says his association is currently discussing the minimum credit score issue with the government and hopes to see a change or amendment made to this rule.

Existing transactions

If you’ve recently purchase a home and are still awaiting closing, you might be wondering how the new rules will apply to loan commitments issued before October 15 and closing on or after that date. According to a memo issued by the government, “The existing rules will apply to loan commitments for which a mortgage insurance application has been received by the mortgage insurer on or before October 14, regardless of the closing date of the mortgage loan. This includes new construction in which the closing may not occur for more than a year after the initial loan commitment was issued.”

With the October 15 deadline looming, Murphy warns prospective buyers not to expect lenders to be eager to offer a mortgage under the old rules. “The government does not want lenders to be providing these products until midnight October 14,” he says. “Lenders have already announced that they are not offering these products anymore, and as we get closer to the deadline, they will be increasingly difficult to find.”