A guide to changing mortgage rules in Canada

Mortgage rules changing

Things are picking up.

I have seen a significant increase in the number of purchases I am working on with clients. I did an informal poll of some of my realtor and broker friends and we are all seeing the same increase in activity.

Last week, I attended a learning session about the recent and upcoming changes to mortgage rules. This year it has felt like changes have rolled out so often it was hard to stay on top of new policies.

I thought it might be good to go over some of the changes, as they will benefit many homeowners and homebuyers.

Please note, this is a quick explanation and you may have questions or need clarification on some of what follows, so please make sure you speak with your mortgage professional before moving forward with a purchase.

In the order the changes were discussed in our session, here is a high-level overview.

Effective Aug. 1, first-time home buyers were able to purchase a newly built home using a 30-year amortization, with a minimum down payment. Prior to this change, the maximum amortization allowed for buyers with less than 20% down was 25 years.

Key to note here is the definition of a first-time home purchase. Purchasing homes is based on the Canadian Revenue Agency’s explanation of home buyers starting out or starting over. That includes buyers who have not owned their primary residence (or lived in a home owned by their significant other) for the last four years. It also includes buyers who were recently separated or divorced.

Also key to note is only one of the borrowers must qualify as a first-time home buyer for these rules to apply.

For the purposes of the Land Transfer Tax in B.C., even if clients are considered first-time home buyers under mortgage rules, they will still have to pay tax if they have ever owned a home anywhere in the world.

There is a small increase to the insurance premium (.2%) if borrowers elect to use the 30-year amortization.

Effective Dec. 15, the price cap for insured mortgages will be increased from $1 milion to $1.5 million. Clients will be able to purchase a home up to this price with a minimum down payment of 5% of the first $500,000 and 10% of any balance over that up to $1.5 million. For the full $1.5 million, the minimum down payment will now be $125,000, compared to the previous minimum down payment of $300,000.

Trying to come up with the required 20% down payment has been a barrier for many borrowers.

The changes to come into effect Dec. 15 also include the ability for repeat buyers to buy new builds with a 30-year amortization.

As well, all first-time home buyers will be eligible to qualify based for a 30-year amortization, regardless of whether they are buying a newly built home or an existing one.

For these guidelines to apply, mortgage applications must be submitted after Dec. 15.

The final change will roll out Jan. 15, 2025. Existing homeowners will be able to refinance their homes up to 90% of the "as-improved" value of their home if they are pulling equity out to create a secondary suite in their home using a 30-year amortization.

What does “as-improved" value mean? With these applications, owners will need to order an appraisal, which shows the current value of the home, as well as the value of the home once the proposed work is completed.

Current rules limit refinances to 80% of the value of the home, so I see this as a significant benefit for owners who are newer to the housing market and can really use the income from a secondary suite.

There are, of course, requirements for this program, including:

• Either the borrower or a close family member must live in one unit of the property.

• You can add more than one unit to the home (up to a total of four), providing zoning allows for that.

• Units must be completely self-contained.

• The financing limit cannot exceed the actual cost of the work.

Is your head spinning yet? Mine certainly is, trying to keep all of these changes straight.

Many lenders are still determining their own policies as to how they choose to incorporate these rule changes into the mortgages they offer. It is important to speak with a mortgage professional to see how these changes may impact your borrowing power.

As I mentioned, we are already seeing a definite increase in purchase activity. It will be very interesting to see if there is a flurry of activity following the implementation of the Dec. 15 changes as well.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Getting a head start on planning for your mortgage is important

Planning for your mortgage

New rule allows larger refinancing for secondary suite creation

Secondary suite financing

Mortgage rule changes seem to be coming at us fast and furious. This isn’t surprising given that we are in an election year.

Several weeks ago, I wrote about the change to the ceiling for the purchase price of insured homes and the extended amortization that will be available. On Oct. 8, the government announced a new program that will come into effect Jan. 15, 2025. It will enable clients who already own their homes to refinance up to 90% of the value of the home to use the available equity to create a secondary suite.

Current rules only allow refinances up to 80% of the value of the home, regardless of the purpose of the refinance.

The parameters of this new program, taken directly from the CMHC website (Mortgage Insurance Rule Changes to Enable Homeowners to Add Secondary Suites - Canada.ca) are as follows:

• This measure will apply to all borrowers seeking to access mortgage insurance in Canada to add more units (secondary suites). Borrowers must satisfy the following requirements:

• Already own their properties

• The borrower or a close relative are occupying one of the current units

• Intend to construct additional units

• The additional unit(s) must not be used as a short-term rental.

• Refinancing—Insured refinancing will be allowed for the purpose of building additional unit(s).

• Legal units—The new units must be fully self-contained units (e.g., basement suites with separate entrances, laneway homes) and meet municipal zoning requirements.

• Number of units—Maximum of four dwelling units including the existing unit.

• Maximum property value limit—The “as improved” value of the eligible residential property against which the loan is secured must be less than $2 million.

• Maximum loan-to-value limit—Up to 90% of the property value, including the value added by the secondary suite(s), in combination with any other outstanding loans secured by the property.

• Maximum amortization—30 years.

• Additional financing must not exceed the project costs.

We are still waiting on clarification from lenders as to their specific guidelines around this program, so I will provide more information as it becomes available.

With respect to what this means in dollars and cents, using a home valued at $800,000, we will now be able to refinance up to $720,000 for the purpose of adding an additional legal suite. Under previous guidelines we would only be able to refinance up to $640,000, so in this example clients will be able to access $80,000 more of the equity in their home. It will be interesting to see what the uptake is for this program.

One particular group of clients I see this benefitting is clients who have only been in their home a few years and who have seen a moderate growth in their equity after they put down the minimum down payment when they purchased their home.

With carrying a higher mortgage and the increased cost of living overall, those clients may really benefit from access to funds to add a secondary suite to their home.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Picking the right amortization differs depending on the homebuyer

Finding the right mortgage

When I am working with clients on their mortgage approvals, there are several decisions they need to make.

The questions differ a bit based on whether we are working on a purchase, a refinance or a straight renewal. We talk about amortization, term and the specific mortgage product. These questions differ a bit based on what we are doing and the clients’ specific situation.

Amortization refers to the total length of time required to pay your mortgage in full. Term refers to the length of time you choose to lock into a specific rate.

Some of the decisions can be scripted if you are purchasing with less than 20% down and your mortgage requires default insurance. These rules have recently changed (again situation specific) but length of term is up to the individual client.

Historically many people have chosen five-year terms because lenders offer lower rates for that term. Over the last two years, I’ve had far more people opt to pay a slightly higher interest rate and choose a three-year term, gambling that rates will be lower then.

Over the last year specifically as home prices have risen at the same time as the cost of living, I’ve had different conversations with clients about the amortization they choose. With the recent announcement of changes coming to maximum amortizations for new builds and first-time home buyers it will be interesting to see how these discussions change over the next few months.

For clients who were working on refinances or purchases with more than 20% down, we had the option of extending to a 30-year amortization. Some clients are resistant to stretching out the length of their mortgage and for solid reasons. Our parents’ generation was all about getting their mortgages paid off as soon as possible. This is obviously the choice that made the most sense and was more achievable for them and has been ingrained in many of us.

Our current reality is that home prices and the cost of living have skyrocketed, while wages have not kept pace. I’ve heard the argument that our parents were not enjoying a lifestyle that included $6 coffees every day. Fair enough.

However, I have clients who live very frugally and are still struggling. Life happens. Divorce or separation happens. Devastating accidents or illness happen. Childcare bills escalate. Jobs are lost. Stuff happens.

Particularly, when I am working with clients who are consolidating or buying at a significantly higher price point, we have a thorough discussion comparing the difference in monthly payments for (usually) a 25-year amortization versus a 30-year amortization. Signing for a shorter amortization makes better sense for your long-term financial plan. However, if the higher payment causes you stress month after month and you end up in the same boat again a few years down the road, the long-term benefit is not there.

Every lender offers several ways to make extra payments against the principal of your mortgage. Interest rates will likely be different every time you renew your mortgage. Your income and bills change over time.

I will always be an advocate for paying your mortgage off sooner, but many of my conversations with clients are pretty raw about the reality of making your payments every month.

The positive news is interest rates have been trending down over the last month, which will help provide a bit of relief. The better news is by making thoughtful decisions around your choices for amortization and term, you may help reduce your overall stress level.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.