Mortgage Rules to Change Again—will it again add to the confusion?

This is the second round of changes to mortgage rules since the spring of 2010. Though probably prudent, will it again cause some confusion among consumers as before?  

This time the Government has announced 3 additional changes to mortgage rules for government insured mortgages. They are:

  1. A reduction in the maximum amortization to 30 years from 35,
  2. Lower refinancing on the value of a home to 85% from 90%.
  3. Eliminating government-insured backing on lines of credit secured by homes.

Effective Dates for the Changes

The lowered maximum amortization and lowered refinancing rules (1 & 2 above) come into effect on March 18, 2011. The 3rd, elimination of government-backed insurance on lines on credit takes effect on April 18, 2011.

Why the Changes: The changes respond to concerns over Canadians’ personal level of debt, with much of it in mortgages. Statistics Canada says household debt climbed to a record 148% of disposable income in the third quarter last year. With current low interest rates, there’s anxiety that Canadians may be purchasing more home than may be affordable when interest rates rise.

Benefits mentioned by Finance Minister, Jim Flaherty:

  1. Lowering the amortization will significantly reduce total interest payments, will build equity more quickly, and “help Canadians pay off their mortgages before they retire.”
  2. Lowering refinancing “will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.”
  3. Not insuring lines of credit will ensure that risks associated with borrowed funds “unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.”

A minimum down payment to buy remains at 5%. But the lower 30-year amort will result in a small rise in monthly payments. Example: on a home price of $200,000 with 5% down and today’s average 5-year fixed rate of about 4%, a buyer’s payment will increase by about $66 per month not including CMHC insurance.

Does a Buyer Lose Leverage on Refinancing?

What happens on buying with 5% down and on expiry of the mortgage and the buyer is above the 85% threshold for refinancing? According to one mortgage agent, the buyer will be able to renew the mortgage with the existing lender.

This leaves the buyer no option to shop mortgage rates. Potentially the buyer is left at the mercy of the existing lender and the renewal rate it may charge. An attempt at negotiating might produce a lower rate. But a buyer may lack the leverage needed to achieve their lowest rate.

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