Today the Finance Minister, Jim Flaherty, announced significant changes to the rules for Canadian mortgages. Directly below you will find some clarification of these rules that was provided by Stephen Gagnon of Mortgage Architects. Following that is an article from today’s Globe and Mail.
1) The major modification is the change from 35yr amortizations to a maximum of 30yrs. Last year, 40 year mortgages were eliminated. However, with low interest rates, this will not affect too many people in the short term. As rates go up it will have a certain impact on some borrowers. This takes effect on
2) Borrowers that are looking to refinance their existing mortgages can now only finance up to a maximum of 85% of equity. This is down from a previous cap of 90% of value. Keep in mind that this is for refinancing only. The minimum down payment for a new mortgage still remains at 5%. This change takes affect on
3) The government will no longer allow HELOC's (Home Equity Line of Credit) up to 90%, and this will be effective
If you have any questions, post them here, or give me a call.
Globe and Mail Update
Three changes include reducing maximum amortization period to 30 years from 35 years
Concern over rising consumer debt levels is prompting
Finance Minister Jim Flaherty announced Monday [http://www.fin.gc.ca/n11/11-003-eng.asp] that new federal rules will reduce the maximum amortization period to 30 years from 35 years for government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.
Secondly,
Thirdly,
Though longer amortization periods reduce monthly payments, they greatly increase the amount of interest paid over the life of the mortgage and make it harder to build up equity.
The average Canadian resale home sold for $344,551 in December. Assuming a five-year mortgage at 4 per cent interest, and the minimum 5 per cent down payment of $17,227, a 35-year mortgage would have monthly payments of $1,441. Shorten the amortization period to 30 years, and the monthly payment increases to $1,555.
At a news conference in
Mr. Flaherty said his concern is not
"We're seeing people borrow to the max, and borrowing to the max at low interest rates," he said. "Most Canadians are not doing that."
Mr. Flaherty predicted the measures will have "some moderating" impact on the housing market.
He said the changes will not take effect immediately because of a requirement to give the industry 60 days notice before making policy changes of this nature.
He said past experience suggests there is no need to fear a rush on 35-year mortgages before the new rules take effect.
In addition to cutting mortgage terms,
Home-equity lines of credit and loans have surged in
The third measure that will reduce how much Canadians can draw on their home equity. Last February the Finance Department announced that it would lower the maximum amount Canadians could withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. It is now reducing that maximum to 85 per cent from 90 per cent.
Observers have been speculating that Finance Minister Jim Flaherty would take steps to tighten mortgage credit in the next federal budget. The timing of the move suggests concerns are growing in government circles about household debt and its impact on the economy.
CIBC chief economist Avery Shenfeld referred to the mortgage changes as part of a larger move by the government to "force Canadians on a debt diet" as household debt levels sit at record levels.
"Policy makers now have that credit buildup in their policy gun sights, and will use higher rates and regulatory changes to bring spending into better line with income, and cool mortgage demand," Mr. Shenfeld wrote in an economic forecast on Monday.
"Canadians aren't on the verge of a U.S.-style default crisis - not at these interest rates, and not with debt having been granted to stronger hands than was the case before
"But maintain this diet of borrowing for five more years and debt obesity would indeed weigh down the household sector's momentum. It's time to start the borrowing diet now, and that means policies aimed at slower debt-financed consumption growth and a cooler housing market."
Bank of Montreal's head of Canadian retail banking supported the government's move, since the bank has been primarily recommending mortgages with a maximum 25-year amortization to build more equity and retire the loan faster, rather than paying more interest.
"The actions announced today by Minister Flaherty are prudent, measured, responsible and timely," Frank Techar, president of personal and commercial banking at
It's not the first time the Conservative government has tinkered with the mortgage market. In 2008, Mr. Flaherty announced
Last February the Finance Department lowered the maximum amount Canadians could withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. Mr. Flaherty also introduced a measure requiring borrowers to qualify for a five-year fixed-rate mortgage, even if they sought a variable mortgage at a lower rate. Until that change, home buyers only had to qualify for the higher of either a three-year fixed-rate or variable-rate mortgage.
The Canadian Association of Mortgage Professionals spoke to the government frequently over the last three months, and was pleased that the changes didn't include any modification to the minimum down payment required to buy a home. And while president Jim Murphy said that he generally approves of the changes to amortization lengths, he hopes the government shows the same willingness to change if the market cools further.
"We understand why he did what he did," Mr. Murphy said. "But we hope when the time comes, he'll revisit that decision. Real estate is very important to the economy, and it's crucial that we find a balance because you don't want to overreact to temporary market conditions."
He said a better choice would have been to keep 35 year amortizations, but force all applicants to qualify with the assumption of a 25 year amortization.
CAAMP, which represents the mortgage brokerage industry, released a study late last year that showed mortgage debt in
There was a jump in the number of Canadians using their mortgages to free up cash, with 18 per cent taking out equity as the cited a need for "debt consolidation or repayment." The average amount borrowed against home equity was $46,000. Given that there are 5.65 million mortgage holders in
"It is estimated that 30 per cent of the takeout was for debt reconsolidation and repayment," the report stated. "Therefore, while the amount of outstanding mortgage debt would have increased by this amount, totals for other types of debt would be correspondingly reduced. About $15-billion was taken out for renovations, $6-billion for education and other spending, $7.5-billion for investments and $4-billion for other purposes."