After Finance Minister Jim Flaherty announced new mortgage rules for 2011, many homeowners and prospective homeowners began to panic.
There are three changes that will take effect on March 18th of this year:
- Maximum mortgage amortization periods will be reduced from 35 to 30 years.
- The maximum borrowing limits for refinancing a mortgage will be reduced from 90 per cent to 85 per cent of the value of the home.
- The government will withdraw its insurance backing on non-amortizing loans secured by homes, including home equity lines of credit.
The new restrictions are being implemented to ensure Canadians do not fall into debt they cannot manage as national consumer debt continues to rise to 148 per cent of disposable income.
The changes are not meant to harm the housing market, but improve it and help keep it stable.
The changes are also in place to protect Canadians from debt when mortgage rates increase, which is anticipated for 2011. Are you ready for home ownership
The first change, to reduce the maximum amortization period by five years on mortgages with loan-to-value ratios of more than 80 per cent, should have little effect on buyers as most choose lower amortization periods so they are not held hostage by their mortgages for longer than they need to be.
This way, Canadians will notice a reduction in interest payments and are more likely to be mortgage-free upon retirement. The minimal increase in monthly payments will be balanced by significant reductions in interest payments.
The second change, to reduce borrowing limits, will decrease misuse of borrowing for consumer spending and effectively encourage saving nation-wide. Fewer Canadians will find themselves lost in unmanageable debt due to using their home value as a savings account. Homeowners will then create more home equity instead of decreasing the value their homes hold by borrowing from the value of the home.
The third change, to remove government backing on insurance for non-amortizing loans, protects taxpayers from carrying the financial burden of homeowners who use the value of their homes to fund consumer purchases and debt. These loans, which are almost always variable rate loans, allow the homeowner to fall victim to rising interest rates. Without government backing, the hope is that fewer homeowners will turn to these lines of credit for frivolous spending.
The changes are part of actions the government is taking to ensure the economy remains stable enough to support home buying and lending practices. Will Canadians rush to buy before March 18, 2011
Flaherty specifically targeted home-equity loans and lines of credit because of concerns that Canadians were spending these loans on frivolous, unnecessary, luxury items rather than on increasing their home equity.