August 1, 2008
Mark Roozendaal (Re/Max Camosun)
On July 9th the Canadian government issued new rules for government insured mortgages. There has been some confusion on what this means so I thought a little clarification would help.
The new rules are only for government insured mortgages and come into place as of October 15, 2008. However, we expect that funders will follow suit and change their individual rules as well. Overall, these changes are designed help to reduce mortgage defaults and so reduce the cost of mortgage insurance. That's the plan at least!
35 Year Maximum Amortization - The 40 year mortgage is on it's way out. The new maximum amortization term will be 35 years. This doesn't make much of a difference to the monthly payment, but save buyers a lot of money in interest over the life of the mortgage.
5% Minimum Down Payment - This is where most of the confusion is centered. Now, the maximum size of your mortgage is 95% of the purchase price of the home, plus closing costs. Technically, you'll need to come up with at least 5% cash for the down payment. But, like everything, there are several ways to tackle this challenge. Some funders are planning non-mortgage loans for the 5% down. For younger buyers a "gift" from the parents is sometimes an option.
More Documentation - Greater emphasis will be put on verifying income and ensuring that the borrower can afford the mortgage.
Increased Credit Score Threshold- The new minimum "beacon" score will be 620 for most borrowers. This is a higher qualification threshold than is currently in place. It is going to be a little harder to get a mortgage. If you have recently purchased a home you already ran into this! Of course, there will be exceptions to every rule. Borrowers with an insufficient credit score but with a good explanation why will be able to apply for an exception.
The trend for the short term future will be to increase the qualification requirements to get a mortgage. Over the last several years there are many examples of mortgages being given too freely - hence the subprime crisis. We're now moving in the opposite direction to create greater stability.