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Jim Flaherty announces new Mortgage Rules

By Howard Sanders • January 17th, 2011

The Federal Govt., worried that the average debt load of Canadian households is on the increase, has finally made a decision as to how this concern will be addressed.

Many were worried that further mortgage restrictions would cool a real estate market that is showing the first tentative indicators of recovery. However, the decision announced by Federal Finance Minister Jim Flaherty appears to be a considered move that will help strengthen the housing market while addressing rising debt.

The changes made to mortgage rules are as follows:

• The maximum amortization period for a government-insured mortgage was lowered from 35 to 30 years.

This first change is likely to have the largest impact. Buyers who purchase a home with a down payment less than 20 per cent of the value of the home are required to purchase government-backed mortgage insurance through Canada Mortgage and Housing Corporation. Under the new rules, mortgages amortized over longer than 30 years will no longer qualify for that insurance, making it effectively impossible to get a highly leveraged mortgage of more than 30 years in Canada. “This measure will significantly reduce the total interest payments for Canadian homeowners,” Flaherty said, referring to the fact that anyone taking a longer amortization on a mortgage would pay much more in interest over time.

• The upper limit that Canadians can borrow against their home equity was lowered from 90 per cent to 85 per cent.

Flaherty pitched the lowering of the amount that can be borrowed against home equity to 85 per cent as a move to ensure Canadians retain more equity in their homes.”This will promote saving through home ownership and limit repackaging consumer debt into mortgages,” he said.

• Government insurance backing on home equity lines of credit, or HELOCs, has been removed.

The final change, to remove government insurance on HELOCs, came as a result of Ottawa’s concern that certain financial institutions were allowing homeowners to roll too many consumer purchases into CMHC-insured mortgages. “I think that’s particularly risky because some of those loans are not used to create housing. They’re used to buys boats, and cars and big-screen televisions,” Flaherty said. “That’s not the business that home insurance was designed for.”

Flaherty called the changes “moderate,” and they did not include an increase to the five per cent minimum down payment required for a home purchase. They also stopped short of a proposal that surfaced last week that would have required 100 per cent of condo fees to be included in the list of expenses that are measured against income when financial firms consider a mortgage candidate. Currently, only 50 per cent must be included.

Watchers reacted largely positively to the news. The change in the amortization period will most likely soften the market for first time buyers but at least the government didn’t raise minimum  downpayments from the 5% level; an action that could have stalled the market completely.

Now let’s see what the Bank of Canada decides tomorrow about interest rates.


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