On July 9, 2012 new mortgage rules went into effect. Those rules included changes
to maximum amortizations on insured mortgages; the price of homes eligible for
mortgage insurance; changes to home equity borrowing and refinancing; and
changes to the maximum gross debt service ratio. But just what exactly do these
changes mean? How will the mortgage rule changes actually affect you?
Changes to Mortgage Insurance
The changes to how mortgage insurance is handled are some of the biggest, and
the ones people will feel the most. Mortgage insurance will no longer be available
for homes that are priced over $1 million; and while this won’t impact too many
people, and even fewer who won’t be able to afford it, there’s another insurance
rule that will have a much greater impact. That’s the rule that reduces amortization
periods on insured mortgages from 30 years to 25. Knocking five years off your
mortgage means that those who have less than a 20 per cent down payment upon
purchase have five fewer years to pay it off. And this of course, means higher
monthly payments for that time you are paying it off.
The amortization changes on insured mortgages also mean that those who need
insurance, and have less than a 20 per cent down payment, won’t be able to qualify
for a mortgage that they would have otherwise. This is because of the shortened
time length, lenders also take into consideration that you have less time to pay it
off.
Home Equity and Home Refinancing Changes
When the new changes took effect, the maximum amount allowed to be borrowed
on home equity loans including home equity lines of credit, and home refinancing,
was reduced from 85 per cent to 80 per cent. Of course, the effect this has is
obvious, and very simple in concept. Those who want to borrow against their home,
or need a new mortgage with a home refinance won’t be able to get as much
money as they once did.
Gross Debt Service ratio/Total Debt Service Ratio
These two ratios are used when a lender is trying to determine how eligible a
borrower is when obtaining a mortgage. Both of these ratios indicate how much
debt a person carries, and how easily they can pay it off. The higher the ratio, the
harder it will be to prevent default. And while the rule used to be that a person’s
total GDS could be 44 per cent, that’s now been reduced to 39 per cent. Even
though this sounds like a major change, it’s not one that’s going to affect a huge
amount of borrowers. This is because most lenders today are already been using
the 39 per cent as a guideline, and have been for some time.
The new mortgage rules are going to affect just about all property buyers and
borrowers. But they will definitely affect some more than others and, if you’re going
to be on the mortgage market now or any time in the near future, you need to
know what your needs are – and what impact the new mortgage rules will have on
those needs.
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