My article in the New Condo Guide. Feb4 - Mar4, 2011

New rules to address a long-term problem.

Finance Minister Jim Flaherty introduced new changes to mortgage rules to address a long-term problem -- Canadians carrying an historically large amount of debt. The recent financial crisis may have brought more attention to this growing problem, and this is the government’s way of trying to avoid anything like what we have seen in the United States.

Mortgages are one of the largest household expenses and one of the few areas the government can still impact consumer spending. The government attributes a lot of the growing problem to high-risk mortgages, credit card debt, longer mortgage amortizations and the Home Secured Line of Credit (HELOC).

The new changes are aimed chiefly at these issues:

•  The amortization period is reduced to 30 years from 35 years

•  The loan to value available for refinancing your home is 85%

•  Secured lines of credit will no longer be insured, maximum loan to value will now be 80%.

This would not be the first time the government has taken action in the mortgage market. In 2008, the Government reduced 40-year amortizations to 35 years, eliminated the 100% financing and the interest only mortgages. So the Finance Ministry is slowly repealing some of the more ‘lenient’ lending practices from a few years ago.

  

Two of the three changes address the concern the government has with Canadians taking on too much debt, that being, the changes to refinances and HELOCs. Essentially, those are the two methods that some Canadians use to take on large amounts of 'Bad' debt, debt that is used to purchase depreciating assets or consumer goods versus 'Good' debt, debt used to purchase investments, start a business or buy appreciating assets like real estate.

Regarding the reduction in amortization to 30 years, it affects the homebuyer, but only marginally. Payments are approximately $100 more per month on a 30-year amortization versus a 35-year based on $300,000 mortgage at today’s rates.

Although these changes may restrict the number of individuals that qualify for a mortgage, it may provide the incentive to those considering a home purchase to act.  Three compelling reasons to purchase sooner, rather than later:

•  Recent correction in Home prices

•  Interest rates are still at historic lows

•  Pending mortgage rule changes

These are prudent steps the government has taken to tackle a long-term problem. Hopefully potential homebuyers not only take advantage of the current low interest rates and home prices, but also take a serious look at their finances and make a responsible decision on their next home purchase.