New Mortgage Rules Effective

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On Thursday, June 21, Federal Finance Minister Sean Cole announced major readjustments to the government’s insured mortgage loan standards. Four measures relating to this type of loan will apply as of July 9, 2012. Here is a brief overview.

Maximum amortization period for mortgages 

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First, the maximum amortization period for mortgages insured by the Good Mortgage and Housing Corporation (CMHC) will be increased from 30 to 25 years. Remember that amortization is the period required for the full repayment of a mortgage.

At first glance, this decrease in the amortization period will certainly result in a slight increase in monthly payments. However, in the long run, the borrower will save considerably in interest. It should be noted that banks will continue to offer a 30-year amortization period, but only for mortgages with an initial payment equal to or greater than 20% of the purchase price.

Refinancing of a mortgage

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Then, the loan ratio granted for the refinancing of a mortgage will increase from 85 to 80%. This measure is intended not only to encourage Canadians to maintain the positive net worth of their homes, but also to save.

In addition, the government will limit the gross repayment ratio to 39% and lower the ceiling on the total repayment ratio to 44%. The difference between the two ? The first is the percentage of gross household income required to cover housing costs such as mortgage payments, property taxes and heating costs.

The second is the percentage of the borrower’s gross income needed to pay for the residence and other claims. These repayment ratios measure the share of household income needed to cover payments associated with the repayment of debt. Before granting a loan, it is important to check both ratios to assess the ability of borrowers to repay their loans.

In practical terms, this measure seeks to prevent Canadians from over-indebtedness and to protect them from a potential economic shock or a rise in interest rates and mortgage rates.

Insured mortgages

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Finally, the government will limit insured mortgages to homes with a purchase price of less than $ 1 million. In other words, only homes with a purchase price of less than $ 1 million will be eligible for government-guaranteed mortgage insurance for new high-value mortgage loans. Borrowers wishing to purchase a home of more than one million will have to make a first payment of at least 20% of the purchase price.

Remember that these measures apply to mortgages for residential buildings of four or fewer units.

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