The end of zero-down and 40-year mortgages
By Fiona Wagner • Bankrate.com
Buying a home is one of the biggest financial hurdles a person has to face. But since the Government of Canada announced
the end of zero-down and 40-year mortgages, it's about to become that much more difficult.
In July 2008, the Department
of Finance announced changes to the rules for government-guaranteed
mortgages. Effective Oct. 15, 2008,
- the maximum mortgage amortization period for new mortgages will be reduced from 40 years to 35 years.
- all mortgages must have at least a five percent down payment.
- homebuyers must have a minimum credit score of 620 and a maximum of 45 percent total debt service ratio (the amount of gross income
that is spent on servicing debt and housing-related expenses such as heat or condo fees).
According to the government's news release, the changes
are "to ensure Canada's housing market remains strong and to reduce the risk of a US-style housing bubble developing in Canada."
Subprime scare
But did the popularity of 40-year amortizations and zero down payments mean we were headed for a subprime mortgage meltdown? Not likely, say
some industry insiders. Unlike US subprime mortgages that were made available to borrowers with a history of credit problems at a low
introductory rate, Canadian borrowers are reportedly on firmer financial ground.
"The products these mortgage insurers were offering
before were not subprime products," says Catherine Adams, vice-president,
home equity, at RBC
Royal Bank. "To get that 100 percent (financing) product, you
had to have a very high credit score."
The question is, if this crackdown on borrowing is for the good of the housing market, how might it affect homebuyers?
"It is definitely a constriction in credit standards," says Adams. "Cash flow will be tighter for a lot of people because their
payment will be larger. Having said that, the interest cost associated with a 40-year amortization is huge compared to a 35, so from a consumer
point of view, Canadians are better off to go with a shorter amortization."
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