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Bank of Canada Mortgage Rule Changes Announced January 2011 – Canadian Mortgage Regulation Changes in Amortization, Refinancing and Home Equity Line of Credits (HELOCs)

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Bank of Canada Mortgage Rule Changes – January 2011 Update

Canada mortgage rule changes.If you are a homebuyer looking to purchase a new home this spring, or a current owner who wants to get a home equity line of credit (HELOC), today’s announcement by the Bank of Canada on mortgage rule changes to sweep the major banks and lending institutions will make it that much harder for you. With record level of household debt in Canada, surpassing debt levels seen in the United States during the recession, Finance Minister Jim Flaherty announced some sweeping changes to the Canada mortgage rules today on January 17th, 2011. In what is called pre-emptive action by the Bank of Canada, the Canada mortgage rule changes are aimed to reduce the amount of household debt and to tighten regulations on subprime mortgages that require mortgage insurance. Through a previous National Post article, it was stated that Canadian household debt had reached an alarming record at a startling 150%. This Canadian household debt way surpasses that of our American counterparts. This 150% measures the ratio of money owed to disposable income in Canada.

The Key Canada Mortgage Changes

Here are the key Canada mortgage changes explained to homebuyers and homeowners:

Change #1
Canadian mortgages with amortization periods longer than 30 years will no longer qualify for government backed mortgage insurance, which is required for homebuyers with less than 20% down payment on a home (both new and resale). The previous amortization period limit for Canadian mortgages was 35 years.

> Adjustments to the amortization change is in effect on March 18th, 2011

Change #2
The maximum amount Canadian homeowners can borrow against the value of their homes has been lowered from 90% to 85% on a refinancing. This stems from the ravid borrowing from Canadian home equity lines of credit of Canadian HELOCs. The numbers actually indicate that Canadian household debt grew most through the borrowing from HELOCs or Canadian home equity lines of credit, rather than an increase in mortgage debt financing for home purchases. Growth in HELOC borrowing has risen 170% in the past 10 years, or twice that of mortgage debt and now represents approximately 12% of household debt.

> Adjustments on refinancing changes is in effect on March 18th, 2011

Change #3
Home equity lines of credits or HELOCs will no longer by backed by the Federal Government. This is very big because HELOCs have been a very popular product provided by the major banks as a way for Canadians to consolidate their debt by borrowing from the equity of their homes. However, with the Canadian household debt surpassing 150%, with most of this debt coming from HELOC borrowing. The Federal Government wants to make sure that Canadians do not borrow excessively from home equity lines of credits for purchasing retails goods.

> HELOC federal government backing will be removed on April 18th, 2011

What Hasn’t Changed When It Comes to New Canada Mortgage Rules?

With a lot of speculation coming to the news before today’s announcement regarding the Canada mortgage rule changes, there are 2 main mortgage regulations that have NOT changed. They include the minimum down payment required to purchase a home and how mortgage financing debt is measured during a mortgage application. Here is more information about the changes that were not implemented in this round of new Canadian mortgage rule changes:

No Change #1
Many homebuyers thought that the January 2011 Canadian mortgage rule changes would include a bump up of the minimum down payment. Currently the minimum down payment on Canadian home purchases is only 5%, and this will actually stay the same. According to the finance minister, an increase in the minimum down payment did not happen in order to strike a balance in the market. However, it is highly anticipated that the Canada minimum down payment will likely increase sometime this year.

No Change #2
When a homebuyer applies for a bank mortgage, there are several calculations that have to be made in order to determine whether you can finance the mortgage debt payments that includes both principal and interest payments. However, there are no plans to target condo purchases by requiring monthly condo fees to be added to the long list of expenses that are measured against income to decide whether a homebuyer can afford the mortgage. Therefore, there are no changes here.

This is the second time that the Bank of Canada has changed the mortgage rules in 2 years as rising concern over the highest record of household debt grapples the nation. Overall, these are good changes.

Click here to read more about the February 2010 Canada mortgage rule changes.





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