Ottawa Changes mortgage rules again

Ottawa caps CMHC mortgages at 25 years and reduces maximum refinance mortgage from 85% to 80% of value of home!

Finance Minister Jim Flaherty outlined new rules aimed at reining in a hot housing market today and ensuring Canadians aren't taking on more debt than they can afford.

Flaherty outlined a series of changes to the rules that govern the Canada Mortgage and Housing Corporation, the crown corporation that effectively oversees the housing market by insuring the vast majority of Canadian mortgages.

The most important new change is that the maximum amortization period to 25 years, down from 30. The longer a mortgage is spread out, the lower the monthly mortgage payments are -- but the more the borrower ends up paying overall over time.

The impact of the change is likely to be significant. It's about the same as a 0.9 percentage point increase on a typical mortgage.

Indeed, the numbers add up. A $300,000 mortgage spread over 30 years at 4 per cent would cost $1,426 a month to pay back. That same mortgage amortized over only 25 years increases the monthly payment by $152 or 10 per cent to $1,578 a month.

Ultimately though, the higher monthly payment saves the borrower money in the long run. The total interest payments are $213,558.91 on the 30-year mortgage, but only $173,416.20 on the 25-year one. The shortened amortization is also likely to affect a huge segment of the market, as about 40 per cent of all new mortgages were amortized over 30 years last year, the Canadian Association of Accredited Mortgage Professionals estimates.

Anyone who needed or wanted a 30-year mortgage before is going to have to qualify under tougher 25-year requirements now.

Ottawa has now moved three times to rein in the maximum mortgage term, since the CMHC briefly started insuring mortgages with 40-year terms in 2006. The limit was brought down to 35 years, then 30 and now the more traditional 25. 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. At 25 years, the maximum amortization period for CMHC-backed loans is now back to where it had historically been before the Harper government began raising the period after taking office in 2006.

The government has also lowered the total amount that Canadians can withdraw when refinancing their homes to 80 per cent of the home's value, from 85 per cent.

Also the government moved to cap the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent in order to get CMHC insurance.

Banks calculate the former by adding up mortgage payments and property taxes on a home loan, and dividing by the borrower's income. The latter adds in other debt payments