New Mortgage Rules: Can you still afford a house?

Posted: January 25, 2011 in Buyers, General Information, Investment, Mortgages
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In a bid to curb rising household debt levels across Canada, Federal Finance Minister Jim Flaherty announced a series of new mortgage rules to protect home buyers from financial difficulty when interest rates rise.

“In 2008 and again in 2010, our government acted to protect and strengthen the Canadian housing market,” Flaherty said in a news conference on Monday. “We continue to do so today.”

Unlike Ottawa’s previous mortgage changes announced in 2010, the new rules may impact affordability for new home buyers. Here are the three big mortgage changes:

1. Government-backed 35-year mortgages are done.

If you don’t have a 20 per cent down payment for your new home, forget stretching your payments with a 35-year mortgage. The new rules reduce the maximum amortization period from 35 to 30 years for government-insured mortgages, basically eliminating 35-year mortgages for home buyers who need mortgage insurance.

This new rule may make homeownership a challenge for some, but it will reduce the interest paid to lenders. For example, under the current rules, a five per cent, $250,000 mortgage with a 35-year amortization would have a $1,253 per month payment. The total interest paid on this 35-year mortgage would be a staggering $276,491.

When the new rules take effect on March 18, a similar 30-year mortgage would slightly increase your monthly payment by $80, but also drastically decrease the total interest paid by $46,170.

2. Borrow less from your home equity.

Have you been tapping your home equity to pay off consumer debt? Well, Ottawa doesn’t like it. The second new rule lowers the maximum amount you can borrow when refinancing your mortgage from 90 per cent to 85 per cent.

3. Say goodbye to government insured HELOCs.

The final new mortgage rule removes government insurance on home equity lines of credit, or HELOCs. At the time of writing, TD Canada Trust still touts their Home Equity Line of Credit as a way to:

“Renovate, take a vacation, purchase a vehicle or recreational property, take advantage of investment opportunities” — possibly the types of debt that Ottawa hopes to curb by removing CMHC insurance from these HELOCs.

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