The new mortgage regulations announced on January 17, 2011 caught much of the industry by surprise – not the actually content of the announcement but the timing of the news. Many expected this message to be delivered at the next budget announcement.
Nevertheless, the announcement has been made and now Canadians are wondering what it all means. Many of the specific details still need to be confirmed by the government, but here are answers to some of your questions.
The Finance Minister announced changes to the following mortgage regulations:
- The maximum mortgage amortization period has been decreased to 30 years (down from 35 years) on insured mortgages, i.e. mortgages with less than a 20% down payment.
- The maximum refinance amount has been reduced from 90% to 85% of the home’s value
- The government owned CMHC will no longer insure home equity lines of credit (HELOCs)
When will this happen?
Changes to the amortization period and refinancing will come into effect on March 18, 2011. The government backing on HELOCs will be removed as of April 18, 2011.
The government has been worried about increasing consumer debt levels for some time now. The debt to income ratio has risen to a whopping 148% for Canadians. The primary reason for the steady increase is mainly due to incredibly low interest rates which have enticed many consumers to take on more and more debt.
Typically, if the government was worried about people borrowing too much they would just increase interest rates, and curb the rise that way. However, given the instability of the US and European markets, right now may not be the best time for the Bank of Canada to announce a rate hike.
By changing the mortgage rules, Flaherty is addressing the main issue of concern for consumer debt – people are taking on mortgages that are too big and they may not be able to afford them when interest rates rise.
The Finance Minister also assured Canadians that he is not taking this step out of concern for rising mortgage defaults. This is about prevention rather than a reaction to a situation that is currently developing.
How will this affect me?
These changes are NOT retroactive. So if you have a 35 year mortgage, it doesn’t mean that your lender is going to come calling to change your contract. The regulations affect NEW high-ratio mortgages.
Many of the details about renewals still need to be confirmed, but it is our understanding that if you have a mortgage with an amortization period higher than 30 years, you will be able to renew with your existing lender with out a problem. For example, if you took out a 3 year fixed mortgage in April 2008 with an amortization of 35 years (and you didn’t put down more the 20%), when you renew your mortgage with the same lender in the next few months you will still be able to keep your 32 year amortization period. Your existing mortgage insurance will be valid for the renewal. However, if you want to switch lenders, you may need to qualify for a 30 year mortgage first. When we have more information on this over the next few days we will be sure to pass it along.
What are the pros?
- A decrease to the maximum amortization period means that consumers will pay less interest and build up equity in their homes more quickly. This promotes savings and allows you to become mortgage free faster.
- By lowering the maximum refinance amount, it discourages consumers from consolidating debt into secured mortgage debt backed by taxpayers.
- The end of CMHC insured HELOCs will place more responsibility on the lenders approving these types of loan, so again, taxpayers are off the hook.
What are the potential cons?
- A larger than expected slowdown to the housing market. Although the intention was to provoke a modest slowdown, these changes could have a more drastic affect and kill the housing market which would be detrimental to the growth of the economy.
- Create a rush on 35 year amortization mortgages over the next 2 months, before the changes come into effect. This might indicate that many consumers can’t afford a mortgage at a 30 year amortization period solidifying the debt concern.
- Fewer options and flexibility for responsible homeowners. Consumers will no longer be allowed to select a 35 year insured mortgage, but make monthly payments as if it were amortized over 25 years (this gives them the option to lower their monthly payments if needed).
If these new regulations don’t do the trick in curbing consumer debt levels, then harsher measures may be required. Flaherty could choose to implement any one of the following which would have a much greater impact:
- Increase the minimum deposit required for a mortgage (it currently sits at 5%)
- Decrease amortization rates to 25 years (this is what the big banks were hoping he would do at this announcement)
- Include 100% of condo fees when calculating the debt to income ratio to determine the maximum mortgage amount available (currently only 50% is included)
The next rate announcement by the Bank of Canada will take place on January 18th, 2011. Our panel of mortgage experts and many top economists do not expect an interest rate increase. However, rates are expected to go up by at least 1% before the end of the year.
How can I be a responsible mortgage borrower?
Prudence and common sense are needed when taking on debt. Consider the following to make sure you’re acting responsibly when it comes to managing your mortgage:
- Get a deposit. Hold off on buying a home until you have a decent down payment saved up. An ideal deposit is 20% of the property value, which might seem high, especially in major cities, but necessary if there’s any dip in house prices. Our neighbors in the south can tell you how scary negative equity can be.
- Make sure you can afford it. When trying to figure out how much debt you can afford, be sure to factor in interest rate increases. You should be able to handle increases of 3-4% (for many people that might be equal to doubling the monthly mortgage payments).
- Pay it down. Take advantage of lump sum payments, prepayments and accelerated mortgage payment options. You’ll pay less interest and build up equity faster.
- Don’t forget the other costs. Make sure you’re putting money aside for emergency home repairs or increases in home expenses like electricity. Many home owners get hit with these unexpected costs and then need to adjust their mortgage payments to cover the new expenses.