The New Mortgage Rules that Actually Made a Difference

Canada’s housing authority says less Canadians are treating their homes like an ATM.

That sounds positive.

The report by the Canadian Housing and Mortgage Corporation (CMHC) says, since new stricter rules were brought in last year by Finance Minister Jim Flaherty, refinancing activity of insured mortgages has dropped by 40%.

In April 2010 Flaherty announced, along with other rules, that Canadians could only refinance a maximum of 85% of their home. Previously that number had been 90%.

These new rules were brought in to encourage Canadians to build up equity in their home and discourage them from using it to buy consumer goods.

Here’s the major issue with these new numbers.

Canadians are still refinancing their homes at 60% of the rate compared to before the new rules were established. Clearly many are still not getting the message and they are setting themselves up for financial heartache.

Here’s why.

Home values in Canada have increased at a record pace in the last three years. Since 2007, on average, home values in places like Toronto have increased almost 20%. Those numbers are much higher in hot spots like Vancouver and Calgary. So if the bank is giving you money based on the current value of your home, it may be a lot more then you first invested.

This could create a U.S style scenario. Where when home prices start to come down and the loan to value ratios increase, many people will find they owe more money than what their house is worth.

Flaherty’s other rules announced in April 2010, were the real game changers. He targeted how Canadians calculate their affordability. For those wanting to take a variable rate mortgage they still have to qualify on the current posted fixed rate being offered. Although most lenders were already employing this strategy, it was about time that it became law.

He also drove real estate speculators out of the market. If you want to buy an investment property you have to put at least 20% down. Gone are the days where you can put 5% down and cross you fingers that values start to increase so you can flip it for a profit. Meanwhile servicing your massive debt.

These two rules are much more effective in making Canadians think about their purchases then dropping the  home equity line of credit, a paltry 5%. And it’s these rules that should be celebrated by anyone worried about a housing market correction in Canada.

If you still want to take advantage of a HELOC, here’s what you shouldn’t do with it.

· Pay your month-to-month bills.
· Buy a car
· Go on a holiday
· Go on a shopping spree
· Make luxury home renovations

NEVER EVER do any of the above. This is how most get into debt they can’t handle.

In my opinion, you should use your HELOC to pay off high interest debt (only if you don’t plan on going and racking up the credit card charges again!) or to finance the purchase of another property and even then only after carefully considering how much debt you will be taking on. If the other property is an investment and you will have tenants, realistically calculate the amount of rent you will be collecting and the costs of owning a second property.

A HELOC can be very helpful. Since the loan is backed by your home, you will be offered a much lower rate of interest to borrow then if you take out a regular line of credit. The money is also a lot easier to withdraw and pay back compared to your mortgage. But remember you are using the value in your home, its money you have already invested.

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Mortgage News / Mortgages

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