This past summer, Canada’s department of finance announced they would be making changes to insured mortgage lending guidelines, making it harder for prospective homebuyers to get a mortgage. In Canada, when you buy a property and you have less than 20% down, the mortgage has to be insured by one of the nation’s mortgage insurers. Since mortgage insurance is backed by the government of Canada, it is within their jurisdiction to mandate changes they feel are necessary. The changes, which took effect on October 15th this year were as follows:
1) Minimum 5% down required on a home purchase (previously zero down was allowed)
2) Maximum 35 years amortization (previously up to 40 years was allowed)
3) Minimum credit/beacon score requirement up from 600 to 620
These changes effectively make it harder for buyers to get mortgages. The changes were mandated in order to reduce the insurance risk and to protect Canadians.
How can prospective homebuyers deal with these changes?
Homebuyers who have been unable to save for a down payment should aim to take advantage of the Canadian Home Buyer’s Plan (HBP). In Canada, first time buyers are allowed to take up to $20,000 out of their RRSP for a down payment on a home and they do not have to pay taxes on the withdrawal. You have fifteen years to replenish the RRSP after taking out funds under the HBP. If you haven’t been making regular contributions to your RRSP, you may also want to consider taking out an RRSP loan to make the most of your allowable RRSP contribution room. Funds must be in the RRSP for at least 90 days before they can be withdrawn under the HBP.
To ensure you meet the minimum credit/beacon score requirements, be sure to establish at least two trade lines. A trade line is a credit card, line of credit or a loan. Don’t cancel older credit cards or make unnecessary loan applications -- doing so will negatively impact your credit score. Avoid carrying high balances on your cards and always pay at least the minimum amount owing.
If you are self employed, be sure to get your taxes done on time. Don’t worry about the fact that you’re not reporting a lot of income (this is a common concern for self employed people). It is understood that for accounting purposes you will minimize the amount of income you are reporting and that your ‘net income’ may not be a good measure of your ability to pay. You can still get a mortgage without have to prove income, as long your credit is good, and as long as you can prove that you’ve been self employed and working in the same business for at least a couple of years.
