GREATER TORONTO AREA REAL ESTATE BLOG
Tighter Mortgage Rules for GTA Housing Market…
GTA Housing Market and new mortgage rules
In July, 2012 new rules that were set in place made it difficult for some to enter our costly GTA housing market. One of those rules saw government fixing maximum Gross Debt Service ratio at 39% and Total Debt Service ratio at 44% on insured mortgages.
New Mortgage rules were passed on June 27th and are acting more like reinforcement to those in place since last year. Here they are in detail:
- For variable income: Lenders must use “an amount not exceeding the average income of the past two years.” Variable refers to things like bonuses, tips, seasonal employment and investment income.
- For rental income: If a borrower owns other non-owner occupied rental properties, the principal, interest, property taxes and heat (P.I.T.H.) on those properties must either be:
- deducted from gross rent revenue to establish net rental income; or
- included in ‘other debt obligations’ when the Total Debt Service (TDS) ratio is being calculated.
- For guarantor income: A guarantor’s income must not be used in GDS/TDS ratios “unless the guarantor…occupies the home and is the spouse or common-law partner of the borrower.”
- Unsecured credit lines & credit cards: For these debts, “No less than 3% of the outstanding balance” must be included in monthly debt payments. Interest-only payments are no longer considered on credit lines. Furthermore, lenders must assess the borrower’s credit history and borrowing behaviour when determining the amount of revolving credit that should be accounted for in debt ratios.
- Secured lines of credit: Lenders must factor in “the equivalent” of a payment that’s based on “the outstanding balance amortized over 25 years.” That payment must use the contract rate (of the LOC) or the 5-year Benchmark rate(V121764) published by Bank of Canada (if the contract rate is unknown). Again, interest-only payments are no longer allowed for debt ratio calculation purposes.
- Heating costs: Lenders must now obtain the “actual heating cost records” of a property. When no such history is available, the heat expense used in debt ratio calculations “must be a reasonable estimate taking into consideration factors such as property size, location and/or type of heating system.” That’s why some lenders have now moved to a set heating cost formula, like:(square footage x $0.75) / 12 months
Compared to past methods (which entailed flat heating costs, like $100/month), the new guidelines can double or triple the heating cost that must be factored into debt ratios on larger properties, and reduce it on smaller ones.t
All of the above mean that it is becoming tougher and tougher for those who have been thinking of entering GTA housing market. No doubt that having a good mortgage broker on your side is essential in helping you find the right mortgage, or any mortgage for that matter at all.
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