Mortgage reforms on the horizon
By Ellen Roseman
Last week, Prime Minister Stephen Harper announced a tax break for the closing costs paid by homebuyers. But he’s not promoting a more important federal initiative that takes effect October 15 (one day after the election).
Major changes are in store for people buying homes who can’t make a down payment of 20% or more. Their mortgages must be insured by the lender – and the premium is often added to the borrower’s debt.
Here are the new rules, announced July 9 for house deals entered into after October 15.
* They apply to residential properties with up to four units.
* No more 40-year amortizations for insured mortgages. The maximum amortization is 35 years.
* Say goodbye to “no money down” mortgages. A down payment of at least 5% is required.
* No government guarantees for high-ratio mortgages that begin with interest-only payments.
* Lenders must document the borrower’s income and the property value to meet a certain standard.
* A previous plan to limit the borrower’s total debt service ratio to 45% has been scrapped.
* A minimum credit score of 600 is required. That has been reduced from the 620 minimum credit score originally announced. A credit score is a numerical value that measures a borrower’s risk, based on a statistical evaluation of information in his or her credit bureau record. A lower minimum credit score was needed to accommodate credit-challenged buyers – such as new Canadians and self-employed business owners.
“That’s one of the few changes the government made,” says Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals.
Lenders will still be allowed to make exceptions up to a certain limit, recognizing that some borrowers with scores below the minimum are otherwise good credit risks. And buyers can still borrow the down payment from financial institutions that offer cash-back incentives on mortgages. They can also borrow from registered retirement savings plan.
Here’s a question for Harper: When will he update the tax-free withdrawal limits on RRSPs, unchanged since the early 1990s? You can borrow $20,000 from your RRSP for a house purchase (or $40,000 for couples who both have RRSPs). But that may not cover the $30,000 down payment on a typical $600,000 property in greater Toronto.
“That 5% is a lot of money,” says Dawn Devcic-Erceg, director of marketing at ResMor Trust Co., a Toronto-based lender that deals with mortgage brokers. ResMor did a survey showing that fewer than half of Canadians (45%) agreed with the tighter mortgage rules and the statement “the federal government needs to protect homeowners.”
That statement is wrong, of course.
The government wanted to protect the providers of mortgage insurance – including the government-owned Canada Mortgage and Housing Corp. – whose potential losses were backstopped by a federal guarantee.
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