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29 Jun

The Feds flex their muscles, new mortgage rules announced


Posted by: Aneta Zimnicki

June 21, 2012 The Federal Government announced  four new clampdowns on insured mortgages (more than 80% loan to value) that will quickly come into effect on Monday, July 9th, 2012.

These changes include:

1. Reducing the maximum amortization period to 25 years from 30 years 

2. Reducing the maximum amount of equity homeowners can take out of their homes when refinancing to 80% from the current 85% 

3. Limiting the availability of government-backed mortgages to homes with a purchase price of less than $1 million

4. Fixing the maximum gross debt service ratio at 39% and the maximum total debt service ratio at 44% 

The first two changes will have the biggest impact on Canadian borrowers, specifically those with low downpayments, trying to just enter the homeownership game.

Note for investment property mortgages, since the requirement is 20% downpayment, these new rules are not applicable.  Investors were already hard hit several years ago when the feds implemented stricter rules on investor property mortgages, the biggest one being raising the minimum downpayment to 20%.

What does this all mean?  What I see is that the government`s hands are tied with respect to raising interest rates, in light of all the global economic instability going on.   However, they are concerned with raising debt levels among Canadians, so the next best thing to do is change the mortgage rules.  Since the government insures most high ratio mortgages (via CHMC), they claim to have the right to set the rules…hence the recent announcement, an attempt to protect Canadians from going deep into debt with homeownership.

This can be considered a little counteractive though, especially on the refinance front.  Absolutely, I agree, people should not be using their home as an ATM for frivolous consumer purchases, but if they are going to do it anyways, why cut them off and force them to use high interest credit cards.   Every action has a reaction, I am not sure the government though this through….We could be seeing even higher debts as a result.  Many times people refinance out of necessity, such as an unforseen emergency or family illness.  Sad to see that now they may be forced to bear significantly higher interest rates as a result of these government regulations.

The change of rules will affect some first time homebuyers with limited downpayment, who are just trying to enter the marketplace. With the new rules now some will be shut out.   Perhaps that is good, people shouldn`t be setting themselves up for `house-poordom`. However, homeownership is the foundation for wealth building, being a renter will never make you wealthier.   I would not be surprised if in some time in the future, there will be complaints that there are not enough `homeowners` in the country and we need to help them start building wealth.  And so the pendulum will swing the other way…

Finance Minister Jim Flaherty mentioned several times that the government should not be in the business of insuring mortgages. I agree! There are private insurers out there already (Genworth and Canada Guaranty), perhaps the private landscape will expand and give consumers more choice and better customer service?