New Mortgage Rules – How Does it Affect Your New Home Purchase or Re-financing Options?

New mortgage and lending rules came into effect on March 18, 2011. Those rules were further tightened again in 2012. According the federal finance minister, these changes were introduced in order to reduce household debt which in the last few years has skyrocketed and prevent the housing crisis that occurred in the United States. The changes to the mortgage rules are as follows:

1. Amortization Period

In 2011, changes were made to reduce the amortization period for new mortgages to 30 from 35.The new rules in 2012 further reduced the amortization periods for new mortgages to 25 years from 30 for government insured mortgages with LTV (Loan-to-Value) ratio of greater than 80%.

How does this affect the amount you pay?

Example – on a $300,000 mortgage, with an interest rate of 4% and 25 year amortization period, your monthly payments will be $1,578.06, an increase of $151.06 if your mortgage had an amortization period of 30 years. Although you have higher monthly payments, the amount that you save by paying your mortgage sooner is can be quite a lot, which will help you build equity faster.

2. Refinancing Values

The new rules will lower the maximum refinancing to 80% LTV which was previously 85%. Again, the rules which were introduced in 2011 reduced the maximum refinancing to 85% which was 90% before that.

What does this mean?

Example – You own a house that is worth $400,000 and you wanted to re-finance it to purchase another property. Previously, after refinancing, the equity left would have been $60,000. With the new rules, the equity left in that same property, if were you to refinance it, would be $80,000.00. With the new rules the maximum amount you can refinance has decreased.

3. Removing government Insurance on Non-Amortizing Lines of Credit Secured by homes, also known as Home Equity Lines of Credit (HELOC)

Under the old rules, homeowners could obtain a line of credit, which would be secured by their home, with a limit of 80% of the market value. Unlike conventional mortgages, there is no requirement to make regular payments on the outstanding principal on HELOCs. There is also the interest rate risk, since the interest rate on these HELOCs usually have variable interest rates.

Under the old rules, there were no regulations for lenders to get insurance on these lines of credits and many times lenders often chose to pool these “secured” lines of credit into a “portfolio insurance”, essentially passing on the risk to the mortgage insurer. The mortgage insurer then in turn passed on the risk to the government (through government insurance). Under the new rules, such lines of credits are not eligible to have government insurance funding.

When purchasing your new home or re-financing your existing home to purchase another property, make sure you take into consideration these changes, as it may affect the amount that you can borrower from your lender.

Contact Conor Zokol of DuMoulin Boskovich LLP for your legal needs.