New Mortgage Rules 101: What You Need To Know

Peter Adler

Filed under: Budgeting & Planning, House & Home, Real Estate, Mortgages, Your Home

Mortgages have never been straightforward, easy-to-understand financial tools. New Mortgage Rules

But now, the government has tightened up some of the rules that govern them, and it's good to know what changes are in store for those who want to buy their first home.

First of all, the changes involve government-backed insured mortgages only.

Here's the deal:

The maximum amortization period will go down to 25 years from 30 years, cutting the total interest payments Canadian families make on their mortgages. This, in turn, helps new homeowners build up equity in their homes faster and pay off their mortgages sooner. The maximum amortization period was set at 35 years in 2008 and further reduced to 30 years in 2011.
The maximum amount Canadians can borrow when refinancing drops to 80 per cent from 85 per cent of the value of their homes. This will promote saving through home ownership and encourage homeowners to prudently manage borrowings against their homes, the government says.
The maximum gross debt service ratio will be 39 per cent and the maximum total debt service ratio 44 per cent. The government says this will better protect Canadian households that may be vulnerable to economic shocks or an increase in interest rates.
Limit the availability of government-backed insured mortgages to homes with a purchase price of less than $1 million.

So what's with the changes? Simple: it makes economic sense to return money tied up in mortgages into free circulation. Of course, that would mean, too, that the government's calculations are correct and the new measures won't scare away Canadians who'd like to get a new home.

On paper, it sounds good. Almost too good. "The reductions to the maximum amortization period since 2008 would save a typical Canadian family with a $350,000 mortgage about $150,000 in borrowing costs over the life of that mortgage," Finance Minister Jim Flaherty said, announcing the new rules.

The new rules take effect as of July 9, 2012.

The Financial Consumer Agency of Canada has come up with several useful tools that reflect the new rules.

Mortgage 101

Step 1: Know what you need and want in a mortgage

Down payment: find out how much money you need to put down to be able to get a mortgage.
Down payment financing option: Home Buyers' Plan: see how you could use RRSPs for the down payment.
Mortgage payments: understanding interest versus principal: learn how your mortgage payments are applied to the loan.
Choosing an amortization period: see how this affects how much interest you pay.
Choosing a mortgage term and type: look at your options before making your choice.
Understanding fixed and variable interest rates: read about the differences and how the decision will affect your payments.
Frequency of payments: see how accelerated payment options can save you thousands of dollars.
Mortgage default insurance: get the details and examples of how this works.
Other insurance options: learn about other mortgage insurance you may be offered.
Mortgage option: Cash back: things to consider before you commit.

Step 2: Shop around and get pre-approved

Before you start shopping around for a mortgage: make sure your credit report is in order to avoid problems.
Understanding the pre-approval process: find out how the process works and get prepared.
Qualifying for a mortgage: understand the formulas used to calculate your borrowing limit.

Step 3: Make the right decision for your needs

Other costs to consider: get prepared for the other costs involved in owning a home.
Your rights and responsibilities: learn about the information you must receive to help you understand key details of your mortgage.

Some more facts: