The Minister of Finance announced today that it is going to change the rule on how government guaranteed mortgages are granted to reduce the risk of a housing meltdown similar to that in the U.S. The new rules:
- Fix the maximum amortization at 35 years for government insured mortgages,
- Requires a minimum down payment of 5% for new government backed mortgages (currently insurance is available through CMHC on 100% finances homes),
- Establishes a minimum credit score of 620 required for mortgage insurance, and
- Requires new loan documentation standards.
The new rules will take effect October 15th, 2008 and allows existing pre-approved mortgages with the 90 day duration to expire.
The government indicated that while Canadians have historically had tighter credit policies than in the U.S. but have seen some innovation since late 2006. Some of the new features appearing in the Canadian mortgage landscape have included longer amortization periods (from 25 to 40 years), 100% financing options, and special products for high value clients.
In Canada the law requires that banks and federally regulated financial institutions obtain mortgage insurance where homebuyers make down payments of less than 20% for the purchase of the home. The insurance is designed to protect the lender from default but is typically charged to the borrower.
The government backed mortgage insurance in Canada is provided by the Canada Housing and Mortgage Company. Private insurers may also enter this market and can receive backing from the government to protect the lender from default. The backing of private insurers is subject to a 10% deductible of the original principal.
For more information see: Backgrounder Residential Mortgage Insurance