Mortgage Changes Designed To Keep Canadians Safe

It was a move that caught many lenders by surprise.

Before the end of the recent parliamentary session, the Conservatives introduced a series of new rules associated with tightening mortgage lending in Canada.  The rules are designed to get ballooning household consumer debt under control but keep a strong housing market going.

The main changes have to do with amortization rates and the amount of equity people can borrow against their home.  The maximum time allowed to pay back a mortgage negotiated today is 25 years, down from 30 years.  In terms of equity, people can now only borrow up to 80% of a property’s value, down from 85%.

Matt Wieler of Castle Mortgage Group in Steinbach says the changes are a good thing.

Matt Wieler

“People are going to be paying off their mortgages a little bit sooner and they’re still going to be paying less interest.  Rather than seeing the government come back and raise interest rates to make this more difficult, we’re excited to see them try to encourage people to try to pay off their mortgages quicker with a shorter amortization, versus raising rates.  I think that’s going to have a positive effect on all consumers in general.”

Wieler says it’s not the first time the government has stepped in to provide a ‘gentle push’ of sorts.

“Back in 2005, we saw amortizations at 25 years and as time went on, we actually watched amortizations climb to 25, 30, 35 and then 40 years.  Since then, there’s been quite a few changes – in 2008 they stepped back to 35, 2010 they stepped back to 30 and now in 2012 they’re going back to 25 again, so we’ve kind of gone full circle.  I think the change is going to be positive.”

While a number of critics would argue the government is being a little too controlling, given the debt ratio numbers recently released by Statistics Canada, some might say the belt-tightening is necessary.  Recent numbers show the average Canadian household now has a ratio of debt-to-disposable income sitting at 152%, up from 150.6% at the end of last year.  Despite the fact these changes could have an adverse effect on his business, Wieler thinks the feds are doing the right thing by stepping in.

“It’s a good, prudent decision by our government to reduce amortization when interest rates are really low to prevent consumers from over-purchasing when interest rates rise back up to the rates they were at 5%.”

Wieler – and a number of other financial analysts – point out that with millions of households living paycheque-to-paycheque, an interest rate hike could put many on the brink of financial collapse and perhaps start a cascade towards the American-style collapse that’s been steadily predicted for years now.  Government officials agree the economy is still in a fragile state and any adverse changes to the rates could put a quick halt to economic growth.  Weiler says that’s why they didn’t change the down payment structure (still at 5%) because doing so would likely be too severe given that the housing market overall is starting to slow down.

A third change to the rules announced had to do with high-ratio mortgages; the government will no longer allow such mortgages over $1 million.  They will also cap the debt service at 39% of a person’s total income.  It’s the first time an official rule for debt service has been put in place, though most banks do not allow mortgages over 40%.


Article sited from:

Jeremy St. Louis, July 3, 2012


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