Say Bye-Bye to 40 Year Mortgage Guarantees

Posted on July 28, 2008 
Filed Under Buying Your New Home, Ottawa Today, Valerie Zinger

MortgagesThere has been significant press around the Federal Minister of Finance’s decision to no longer provide government guarantees to 40 year mortgages.  In addition, the guarantee is not available for 100% financing of a home.  The buyer will be required to provide a minimum of 5%.  This could be borrowed, but it will not become part of the government  guarantee.  These changes will become effective October 15, 2008.

What is Mortgage Insurance?  A government guarantee is actually government backed mortgage insurance.  Mortgage insurance (which is sometimes called mortgage default insurance) is a credit risk management tool that protects mortgage lenders from losses on mortgage loans. If a borrower defaults on a mortgage, and the proceeds from the foreclosure of the property are insufficient to cover the resulting loss, the lender will submit a claim to the mortgage insurer to recover its losses. (from the Department of Finance website)

What is the Impact of a 35 versus 40 year amortization period on a $200,000 Mortgage?  If you cannot get a 40 year mortgage, then 35 year amortization periods continue to be available.  The example Finance uses is:  Reducing amortization from 40 years to 35 years on a mortgage loan of $200,000 with a 6 per cent interest rate results in a $41 increase in a borrower’s monthly payment, but the borrower will save $49,000 in interest payments.

Are there other changes?  Four other changes will be taking place. 

1.  Credit Scores:  “Canadian lenders have not originated many government-backed mortgages for borrowers with low credit scores. To ensure this practice continues, the new framework will establish a credit score floor of 620. There will also be a limited “basket” to provide for exceptions to this rule, recognizing that there are some borrowers with credit scores below 620 that otherwise represent low credit risks.”

2.  Loan Documentation:  The guarantee will now require a minimum loan documentation “standards to ensure that there is evidence of reasonableness of property value and of the borrower’s sources and level of  income.”

3. Interest Only Mortgages will not be covered.

4.  The total debt service ratio (portion of gross income that is spent on debt service and housing-related fixed or essential payments) will be set at a maximum of 45%.

I have included this information to give you a briefing on upcoming changes.  If you need additional information, it is available on the Government of Canada Department of Finance site, with mortgage brokers, and at your financial institutions. 

Before shopping for a new home, shop for your financing.  Know what is available to you.

  

Photo credit:  3D Realty Handshake @ http://www.flickr.com/photos/lumaxart/2136953043/

Valerie Zinger ~ Ottawa, Canada ~ Ph. 613-723-5300 ~ Email vzinger@royallepage.ca

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