Finance Minister Jim Flaherty announced today new rules for the Canadian mortgage industry that he says will "protect the stability of the economy."
The announcement comes on the heels of a recent warning from the Bank of Canada that Canadians' domestic debt burden is the highest on record, even higher than our neighbours to the south. The ratio of household debt versus disposable income has now reached 148% according to the Bank.
Monday's announcement included three new rules for mortgages that will come into effect on March 18:
- Mortgage amortization periods will be reduced from 35 years to 30 years.
- The maximum amount Canadians can borrow to refinance their mortgages (loan to value) will be lowered from 90% to 85% of the value of their homes.
- The Federal Government will withdraw its insurance backing (CMHC) on lines of credit secured on homes, such as home equity lines of credit.
Low interest rates and 35 year ammortization periods have made it easier for Canadians to borrow insured mortgage monies from banks. However, Flaherty warns that this type of ready access to mortgage funds has inspired people to borrow more than they normally would have. It is extremely important for buyers to consider their "Wants" versus "Needs" in a home purchase and have an appropriate mortgage budget to match. We have all heard the saying of "Home Poor" before and the mortgage changes on March 18 are meant to safe guard against the over-spending mentatilty of some borrowers. The best advice I give to new buyers is go to their local bank or mortgage broker to find out what type of mortgage best suits their needs. Once you have an idea of the mortgage amount you qualify for, you can shop for that perfect home with confidence.
So the question many are asking is how will these changes in the mortgage industry will affect home buyers? Simply put, those first time buyers looking to purchase a home after March 18 will qualify for less and have higher monthly mortgage payments. They say timing is everything and it looks like Canadians will have an opportunity to take advantage of low interest, 35 year ammortized mortgages for a little while longer.