What do the New Mortgage Rules Mean—in plain English?

Mortgage

At the beginning of this week, the federal finance minister announced some changes to Canadian mortgage rules, but you may still be wondering what all these changes really mean and how they may impact you. Here’s how it boils down:

New or First Time Home Buyers
You can still buy a home with only a 5% down payment. However, you can no longer choose to pay off your mortgage over 35 years. You will now have to pay it off in 30 years or less (25 years is normal). This shouldn’t be a big deal for most new homebuyers. Only a small percentage of homebuyers took advantage of the 35 year option anyway. After all, who wants to sign up to be in debt for 35 years? Most people don’t even stay married for that long!

The advantage of having 35 years to pay off your mortgage is that it makes your payments smaller. This means that you could buy a much more expensive house or make your mortgage payments much more affordable. The down side is that it’s 35 years of your life plus higher mortgage insurance fees and you’ll pay a whole lot more interest.

Existing Home Owners
If you are an existing home owner and you want to refinance your house to take some money out to pay down your credit cards or complete some home renovations, this just became a little harder. Under the new rules, home owners will only be able to refinance (take money out of their house) for up to 85% of the value of their home. The previous limit was 90%, and a year ago it was 95%. Existing home owners will also only be able to refinance up to 30 years rather than for 35 years.

What This Means for Everyone
One additional change that could affect new as well as existing home owners it that your line of credit can no longer be secured by your home if you are borrowing more than 80% of the value of your home.

What's So Important About These Changes?
What is significant about all of these changes is that this is the second time within a year that the federal government has tightened mortgage rules. The federal government is trying to make steady strides towards preventing people from overextending themselves, thereby preventing a U.S. style housing crises.

These changes should be a wake up call. Recent news reports suggest that Canadians are now carrying more debt than Americans; in fact, we’re spending $3 for every $1 we earn. Some people are even used to racking up their credit cards and then putting the debt onto their mortgage. Doing this time and time again is not sustainable. These changes are meant to slowly cool down some people’s excessive spending, and make it a little harder to use their home as a bank machine.

The other important thing that the finance minister is mindful of is higher interest rates. Interest rates will not remain this low forever, and when they go up, monthly payments will go up as well. Anyone who has overextended themselves financially will have a hard time surviving. No one wants to see people lose their homes, so these changes are meant to restrain peoples’ spending a bit more.

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