"Designed To Build Up Equity And Pay Off Mortgages Before Retirement"
This year started off with a bang as Finance Minister Jim Flaherty announced that concern over rising consumer debt levels is prompting Ottawa to make changes to Canada's mortgage rules.
- The new federal rules will reduce the maximum amortization period to 30 years from 35 years for government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.
- Ottawa will lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes.
- Ottawa will withdraw government insurance backing on lines of credit secured by homes.
Excerpt from Financial Post, Jan 17, 2011
The minimum down payment, at 5%, will remain as is. Mr. Flaherty said the government could have gone further by boosting the minimum down payment but opted not to in an effort to strike a balance. “We do not want to create any shock in the market or any sort of dramatic pressure. We want to be moderate.”
The changes to the country’s mortgage rules -- the second in as many years -- emerge amid rising concern about the record levels of household debt, which measured as a ratio of money owed to disposable income nears a startling 150% as of the third quarter of last year.
The Bank of Canada recently warned debt levels are growing faster than income, and the risk posed by consumer indebtedness to the domestic economy would continue to escalate without a “significant change” in how consumers borrow and banks lend.
Lets look at the bright side with these changes in mortgage terms:
Five Year Fixed Qualification Rates:Now borrowers must qualify buyers using a 5 year fixed rate.
Is this really a big change considering that lenders were already using three or five year mortgage rates to calculate a borrower's debt service ratio? It's not really that much more difficult to qualify for a variable-rate mortgage now; the qualifying rate will be up from around 3.25% to 3.89%. The reason for this move by the Government is to prepare Buyers for higher interest rates in the future which is probably a necessary approach.
90% Maximum Refinancing
The goal of this rule is to start to get us to save!
Not such a bad concept is it especially when the Bank of Canada reported that debt levels are growing faster than income. The traditional concept of building equity in a home is reassuring when prices start to drop and it discourages homeowners from accumulating debt and using home equity to get themselves out of trouble. I can already hear the comment "but now people can't pay off high-interest debt with lower-cost mortgage money" which lends itself to the question of how smart is it to use your home like an ATM machine? Home ownership can be a decent way to save money provided the equity is allowed to build and it isn't drawn out to spend.
80% Maximum Insured Financing on Rentals
This has moved to up to "20% down" from the previous "5% down" to get an insured mortgage and yes, I believe it will reduce speculation, but many disagree with me.
It would seem that there are no rules as to where the 20% can come from, so that would mean investors may borrow money from elsewhere to create the 20% required. For instance, they could withdraw equity from their principal residence to meet the 20% threshold on a second investment property (assuming it's allowed). Also this rule does not apply to multi-family homes such as duplexes and triplexes so maybe I am wrong and speculation will continue at the current levels. Time will tell and I must ask whether cooling speculation is really such a bad thing when we look south of our border?
Dates to remember
The changes will be implemented in stages, with adjustments on amortization and refinancing limits coming into force on March 18.
Government backing on Home Equity Lines Of Credit, (HELOC) will be removed as of April 18.
* The government said exceptions would be allowed after the new measures come into force when needed to satisfy a home purchase or sale and financing agreement struck before the March and April in-force dates.
Reference: CMHC and Department of Finance Canada press release