Rule Changes - The Ugly
Hope you are all enjoying the summer and getting ready to get back to normal routines.
Back in July, the Canadian Government made changes to the mortgage lending rules and I would like to review four financing situations that highlight how much impact these changes have going forward.
1) Nullified Switch
The Facts: Your existing mortgage with a remaining amortization of more than 25 years is up for renewal. You have less than 20 percent equity. You have found another lender with a great rate but your gross debts exceed 39% of your income.
The new reality: Kiss the better rate goodbye. Only your existing lender with the higher rate can re-lend without re-qualifying you.
2) Consolidation Blues
The Facts: You have an existing mortgage and would like to increase it to consolidate some high interest debt or to make improvements to your home. However, the additional needed funds push you above the 80% refinance limit.
The new reality: No can do. You will have to continue paying the high interest debt as is. As for the home improvements, you might have to forget them or obtain a higher interest loan elsewhere. All this comes at a higher interest rate than it would have under the old rules.
3) Moving up!
The Facts: You have outgrown your existing home and would like to buy a bigger and more expensive one. You want to increase your existing mortgage to do this but have less than 20% equity.
The new reality: You will have to qualify under the new rules on your entire mortgage, even on the existing part. This means that your gross debts will need to be less than 39%, you are capped at 25 year amortization and the purchase price will need to under $1 million.
The Facts: You have an existing home equity line of credit (HELOC) and want to make some changes such as change the lender, increase the borrowing amount or add a new mortgage portion to the HELOC.
The new reality: Any of these changes could limit your HELOC to 65% of the value of your home.
These are only four examples which hopefully show the implications of these new rules. I am sure there are many others but at least this will get you thinking. The Government’s objective to reduce Canadian household debt is a good one. However, I question whether some of the new rules do this. Also, studies show that mortgage debt is not the big issue. It is credit card and other debt that needs controlling.