British Columbia’s Ministry of Finance announced new guidelines for banks and lenders earlier this year, to tighten up the lending of residential loans. These guidelines went into effect in April 2011. The changes in lending guidelines were focused on the loan-to value ratios and amortization periods of residential mortgages. This is information that mortgage brokers need to understand so they can better assist their clients.
Important Definitions for Borrowers to Understand
A loan-to-value ratio is the ratio of the mortgage loan as it relates to the to total value of the property. What does this mean to consumers? Let’s say a property is determined to be worth $500,000.00 and the mortgage loan being advanced to you is $400,000.00. This indicates two things. First, the down payment the bank or lender expects a borrower to make is 20%. Second, the loan to value ratio is 80%.
An amortization period is the length of time over which a loan is to be paid down to zero. When reference is made to a 3-year or 5-year ARM, it indicates the period of time that the Rate will remain fixed. This is not to be confused with the amortization period. Generally speaking, the amortization period is 25, 30 or 35 years for a specific amount. The shorter the amortization period, the higher the monthly payments.
What Do Changes in BC Create New Guidelines?
Changes that came into force in 2011 are as follows:
• For borrowers who need to borrow less than 80% of property value (the loan is called a conventional loan), the maximum amortization period of 35 years will continue to be available.
• For borrowers who need to borrow more than 80% of property value (the loan is called a high-ratio loans), the maximum amortization period has been reduced to 30 years.
• For those refinancing their mortgage, the maximum loan to value ratio has been reduced to 85%.
How Do These Changes Affect BC Borrowers?
It may be more difficult for mortgage brokers to find loans for borrowers who don’t have 20% to put down on their home purchase. While a longer amortization period increases the total amount of interest paid on a home, it does reduce the monthly payment, which makes it easier to afford buying a home instead of renting.
Those borrowers facing refinancing may also find themselves in difficulty if they don’t have adequate equity built up in the home. They now must have at least 15% equity to refinance. With a softening Canadian market, this may become a problem for many homeowners. » Read more: Changes in Loan Guidelines Impact Buyers Are BC Residential Home