The Minister of Finance recently announced changes to CMHC mortgage rules, coming into affect March 18, 2011, which could have a significant impact on your mortgage strategy. CMHC (Canada Mortgage and Housing Corporation) insures mortgages that require more than 80% financing, so these changes will mostly affect first time home buyers and those who leverage their home equity for debt consolidation or investment purposes.

Essentially, these changes will reduce the overall amount for which borrowers can qualify, as well as restrict the refinancing flexibility of current homeowners with less than 15% equity in their homes. The exact changes are as follows:

The first change reduced the maximum allowable amortization period for insured high-ratio mortgages from 35 years to 30 years, effective March 18, 2011. (Put another way, this means that the longest you can take to pay back your high-ratio mortgage loan is now 30 years.) In real numbers, the change from 35 years to 30 years means an additional payment of about $100/month on a $300,000 mortgage at a 4% interest rate.

The second change reduced the maximum loan-to-value allowed on high-ratio refinance transactions from 90% to 85%, also effective on March 18, 2011. (In simple terms, this means that if you want to refinance your current mortgage, the most you can borrow is 85% of the current value of your property). Here, the government is trying to pre-empt a refinancing binge where low interest rates cause people to use their homes as ATM machines, which was commonplace in the U.S. during their housing bubble. The more equity a home owner has in their property, the bigger their buffer if house prices fall (and by extension, the safer the lender’s loan and the tax-payer’s money that guarantees it through CMHC

So what does this mean exactly? For a potential home buyer, if you have an annual household income of $60,000 you can currently qualify for a $312,000 purchase, using the 35 year amortization and 5% down payment. Under the new rules, because of the reduced amortization to 30 years, you will only be able to purchase a $289,000 property (a drop of $23,000 in purchasing power).

To afford that $312,000 property your annual household income will have to be $64,000 or higher.

For those who already own their home, these changes are going to impact your refinancing flexibility, reducing your ability to borrow equity back out of your home to consolidate other debts at a lower interest rate or use that equity for investing.