by Jason Roy

On January 17th the Federal Government announced a few changes to how high-ratio (over 80% loan to value) mortgage will be qualified.

These changes won’t officially take place until March 18th but some suggest that lenders may begin to tighten up their lending criteria sooner than that.

In summary the new rules will be as follows:

1. The maximum amortization of high-ratio mortgages will be reduced from 35 years to 30 years.
2. Canadians can only borrow up to 85% of the value of their homes when refinancing and existing mortgage, down from 90%
3. CMHC will no longer insure lines of credit secured by homes, ie. Home equity lines of credit (To be implemented April 18th 2011)

So what does all this mean??

1. Reduced Amortization: If you are not able to put at least 20% down when purchasing a home or refinancing your current home you will only be able to extend your amortization out to a maximum of 30 years.

Having a look at an example we can see what effect this will have.
• Purchase price: $400,000.00
• 5% down payment: $20,000.00
• Interest rate: 3.69%

With a 35 year amortization the monthly mortgage payment would be $1,656.97 and with a 30 year amortization the monthly payment would be $1,792.26.

In this example we can see that the difference in the monthly payment is $135.29.

Besides having a higher monthly payment there are several other things to look at and consider.

Some of the negative concerns with shortening the amortization are:
• Higher mortgage payments
• May not qualify for the mortgage if you cannot debt service the larger payment

Some positive aspects with shortening the amortization are:
• Reduced CMHC insurance premium required
o In the above example you would save $760
• You will pay your mortgage off 5 years sooner
• You will save $49,949.51 in interest costs (assuming the same rate for the life of the mortgage)

2. 85% Refinance: The reduction in the maximum loan to value that can be mortgaged when refinancing will in theory allow people to keep more equity in their home. While this may be true and a positive to your net worth it will have an impact on those who are carrying a large amount of high interest credit debt.

Again let’s look at an example to see how this will have an impact.
• Home value: $400,000.00
• Current Mortgage: $325,000.00
• Current Mortgage Payment: $1,517.97
• Mortgage Interest Rate: 3.69%
• Mortgage Amortization: 30 Years
• Total High Interest debts: $35,000.00

If we assume that the minimum credit card payments total up to 2% of the outstanding balance you would have a monthly payment of $520

If you were to refinance the current mortgage up to 90% loan to value you would be able to consolidate all of your high interest debts into your mortgage and have a new mortgage payment of $1,685.56. When compared to having a mortgage payment of $1,517.97 and a credit card payment of $520 you can see that the total monthly payments go from $2037.97 down to $1,685.56. That is a monthly payment savings of $352.41.

Looking at only being able to refinance to 85% loan to value you will only be able to refinance up to $340,000.00. This would give you a new mortgage payment of $1,588.03 but would also leave you with $20,000.00 in credit card debt. These extra credit card debts would add another $400 bringing your total monthly payments up to $1,988.03.

The difference in the total monthly payments is $302.47.

As you can see strictly from a monthly payment comparison, the reduction in the maximum loan to value that can be mortgaged will have an impact on your total monthly payments and could cost you more.

This is not to say that there are not other aspects to consider before consolidating your debts into your mortgage but for those that require this there will be a potentially negative impact.

3. No longer insuring Home Equity Line of Credits (HELOC’s): High ratio HELOC’s have been gone for a while now so you already are required to have a minimum of 20% down payment (or equity). The change here is more of a behind the scenes thing. Many lender securitize their mortgages (pool them and sell them under the CMHC program) to improve their cash flow. This allows them to “sell” mortgages and add those funds back to the lending pool and continue proving more mortgages. For these lenders the HELOC’s are also included in this securitizing. It will have to been seen what the effect is for each lender but it will for most reduce the amount of mortgage funds they have available to lend as they will have to keep HELOC mortgages on their books. I predict that many lenders will have to stop offering this product all together.

Home equity line of credits differ in many ways from a regular mortgage and choosing to obtain this type of mortgage needs to be evaluated differently.

At this point it is too early to see what the net positive or negatives will be from all of these changes.

If you are considering purchasing a home this year or refinancing your current mortgage, your first step should always be to organize your finances. I recommend setting up an appointment with a residential mortgage specialist to discuss your situation and find out what your options are.

Jason Roy AMP
Residential Mortgage Specialist

TMG – The Mortgage Group Canada Inc.

Direct: 780-463-4713
Toll Free: 866-612-1312
Email: jroy@mortgagegrp.com
www.jasonroymortgages.ca