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Homeownership - Learning about the mortgage end! (3) Mortgage Rules/Restrictions

This is instalment number (3) in the Homeownerhip/Mortgage series about the things you should know regarding the largest investment/debt in the lives of most Canadians. Since there have been some changes recently regarding the government regulations for mortgages, I will review some of the basics that will likely be important to most of us.

With all mortgage options there are limits and restrictions that may affect the choices you make and your ability to handle any new mortgage obligation. These are the maximum funds available, minimum downpayments, maximum amortization periods, plus high and low ratio mortgages.

Maximum Funds - It is normal to try and access as much mortgage money as you can to purchase a home, but there are rules/restrictions on what percentage you are permitted to use. This rule applies differently for refinance of an existing mortgage to obtain funds. In all cases there are additional options/conditions if you own multiple properties.
     Purchase - 1 or 2 unit property: If you are occupying the property as your personal residence you may access up to 95% of the purchase price on a mortgage. If you are using it as a rental property then you will only be able to borrow up to 80% of the purchase price.
     Purchase - 3 or 4 unit property: For this type of property that is owner occupied, you will be restricted to 90% of the purchase price with the same 80% of the purchase price required for a rental property.
     Refinance - 1 to 4 unit property: If you wish to refiinance an existing property to access the equity for any reason such as improvements, repairs, debt restructuring or other major expenditure, the maximum funds will be restricted to 80% of the appraised market value regardless if it is owner occupied or a rental property.

Minimum Down Payment - There has been a lot of confusion with respect to down payment guidelines, largely due to misinformation from people you know and sometines the media who pass on partial facts that are often interpreted as the complete book of knowledge.
     Purchase - 1 or 2 unit property: For an owner occupied property, you are required to pay a minimum of 5% of the purchase price as a down payment. If it is for a rental property, you have to pay at least a 20% down payment.
    
Purchase - 3 or 4 unit property: Under owner occupied, a minimum of 10% of the purchase price is required as a down payment while a rental property still requires a minimum of 20% of the purchase price.

Maximum Amortization -
This is the maximum number of years to be used for calculating a mortgage payment. The shorter the number of years in your amortization period, means a higher monthly payment. The government recently dropped this maximum from 30 years down to 25 years for any high ratio mortgages. If you only require a low ratio mortgage then some lenders are still offering the 30 year maximum.

High & Low Ratio Mortgages - The ratio of your mortgage is determined by the amount of funds borrowed against the value or purchase price of your property. This relates to the Maximum Funds section above. If you require a mortgage above 80% of the property value it is considered a high ratio mortgage while anything at 80% or less is considered a low ratio mortgage. In addition to the reference to the situation for Maximum Amortization, there is another issue with high ratio mortgages. Whenever a high ratio mortgage is given by any conventional mortgage lender they are regulated to obtain mortgage default insurance through either CMHC, Genworth or Canada Guaranty (government backed and privately owned mortgage default insurers). These companies have similar guidelines, with a few exceptions, and they require an insurance premium or fee that is usually added to the mortgage amount after your down payment is deducted.

This is a small summary of the details surrounding items noted in this post and they will require some further explanation. For the proper interpretation and guidance, you should contact your mortgage professional for further assistance.

Please email me feedback on the information provided. Send your comments to dennis_smith@centum.ca.

Stay tuned for the fourth and final segment of this series on Homeownership - Learning about the mortgage end!
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