What the new mortgage rules mean for the Toronto housing market

The federal government announced today that they will be tightening mortgage-lending rules in order to address rising debt levels and housing prices. These changes will take in effect on July 9th, 2012.

The four measures will only be applied to new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent:

Reducing the maximum amortization period for a government-insured mortgage from 30 years to 25 years. Reducing the amortization period will increase monthly payments, but reduce the amount of total interest paid on a mortgage. Ottawa expects the change from a 30-year to 25-year amortization will, on a $350,000 mortgage loan at four per cent, increase the monthly payment $177 but reduce total interest costs by nearly $47,000.

Under the new rules, Canadians can spend a maximum of 39% of their gross household income on home expenses such as mortgage, property taxes and heating, and a maximum 44 per cent of income on housing expenses and all other debt. It will be more difficult to quality for a mortgage after July 9th, but it will better protect Canadian households that may be vulnerable to economic shocks or an increase in interest rates.

For refinancing or Home Equity Lines of Credit (HELOCs), the government will lower the maximum Canadians can borrow against their home to 80% of its value, from 85%, in an effort to encourage them to keep more equity in their homes.

Ottawa will limit the availability of government-backed insured mortgages to homes with a purchase price of less than $1 million.

The government believes less than five per cent of home buyers will be affected by these stiffened rules.

These changes will probably have the biggest implication for first time home buyers who may be struggling to save up for that down payment and to get into home ownership. However, for those who have the down payment ready, this may be welcomed news with hopes of real estate prices cooling slightly or remaining stable. I expect to see a lot of buying activity between now and July 9th.

For the most part, this clapdown is good for all of us. This will help ensure that the all-feared bubble burst will not occur and that Canadians will not mimic the US sub-prime crisis.

Have questions on how this affects you? Contact me for more information.

Ashley Lo | Real Estate Advice, Real Estate Solutions

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