The Canadian Government continues to worry about the ever-increasing debt load of Canadians. Debt to Personal Disposable Income ratios have climbed to a whopping 152 per cent! Jim Flaherty needed to pump the breaks and slow Canadians down before reaching the toxic 160 mark – the rate that sparked a major downturn in both the British and American economies.
What Are the New Changes?
1. Reduce the maximum amortization period from 30 years to 25 years
2. Reduce the maximum loan to value (LTV) ratio on refinances from 85 per cent to 80 per cent
3. Insurance is limited to homes with a purchase price of less than $1-million
4. Maximum gross debt service ratio (GDSR) fixed at 39 per cent and total debt service ratio (TDSR) fixed at 44 per cent
Deflating the Bubble
Mark Carney has warned Canadians to anticipate a rate hike in an attempt to keep consumer spending in check and dampen the side effects of having rates so low for so long. However, Carney can ride the coattails of Jim Flaherty with his big announcement today. Carney is able to monitor the effects of these changes to the Canadian economy and hold off on any rate changes amid the uncertainty of the global markets.
TD’s Chief Economist Craig Alexander mentions that the full effect of this change will not be felt for about a year and anticipates that the amendments will signal home prices to decrease on average by 3 per cent and overall home sales to fall by 9 per cent.
The Best Way to Get Results
Avery Shenfeld of CIBC World Markets feels that Flaherty made a smart move. Something had to be done and the government could only sit back to watch this bubble take form for so long. Fortunately there is a solution aside from announcing rate hikes – which could further deteriorate an already weak economy. This solution speaks loudly to the housing market whereas the repercussions of a rate hike would be felt across many industries.
What Do These Changes Mean for the Canadian Consumer?
On Amortization: Keep in mind that the increased challenge of affordability will only be felt by those who are looking for a 30 year amortization who have less than a 20 per cent down payment. Conventional mortgages will still be offered on a 30-year basis. For any given mortgage, a lower amortization period will mean a slight increase in monthly payment; however a substantial decrease in the amount of interest paid over the life of the mortgage.
On Refinance: Capping the maximum loan to value on a refinance at 80 per cent will ensure that home equity remains at a healthy level and hopefully assist with keeping consumer debt levels under control. Decreasing the LTV on a refinance will also save consumers on CMHC insurance premiums.
On Debt Servicing Ratios: Lowering the GDSR and TDSR will prevent Canadians from overextending themselves and hopefully reduce the number of financially vulnerable households on the market.
Waiting for Your Mortgage to Fund? What You Need to Know:
Exceptions will be made to satisfy existing purchase and sale, financing or refinancing agreements where an insurance application has been made before July 9th, 2012. Although the announcement was made today, any insurance applications received between now and July 9th, 2012 that do not meet the new regulations must be funded by the end of the calendar year.