New Mortgage Rules For Canadians

This morning Finance Minister Jim Flaherty will introduce new mortgage rules designed to reduce Canadians’ high household debt levels.

  1. Mortgage amortization periods will be reduced from 35 years to 30 years
  2. The maximum amount Canadians can borrow to refinance their mortgages will be lowered to 85% from 90%
  3. The Government will withdraw its insurance backing on home equity lines of credit

The new regulations hope to help Canadians get rid of their mortgage debt before they retire by significantly decreasing interest payments over the life of the mortgage.  They also want to encourage more responsible lending and borrowing while encouraging people to increase the equity in their homes.

Related: Why Our Debt To Income Ratio Is Misleading

For the past year the Bank of Canada has warned us that Canadians have taken on too much personal debt.

Whether they’re buying their first home, upgrading their house, taking out an investment loan, or using a home equity line of credit for renovations or personal use, it seems like everyone is taking advantage of this low interest rate environment.

The ratio of household debt to disposable income has now reached 147%.  Meanwhile interest rates have had nowhere to go but up for a while now, but due to the delicate global recovery they have only been inching up slightly.

As my wife and I are just about to start building our new house I was interested to see this announcement from the government.

The change in amortization rules will not affect the costs of buying a house for us as we plan on taking a 25 year amortization with our new house.  But the change in refinancing rules from 90% to 85% could have an impact on our plans to stay in our house while we build the new house.

As I discussed in a previous post, in order to stay in our house while the new house is being built we would need to take out most of our home equity to pay the home builder during the 3 phases of the building process.

But since we can now only take out 85% of the value of our home (minus the current mortgage), this decision will impact what we can withdraw by $12,500.

Since our home builder only takes 4-5 months to complete a new house, we will need to ensure that we are able to sell our existing house during that time frame.

I’ve been following the comparable homes in our area on MLS and am confident we will be able to price our home just below market value in order to trigger a quicker sale.

We will be working with our home builders’ new program where they will get us listed on MLS but we will be responsible for taking calls from other realtors to view our house.  In return we won’t pay any real estate commissions.

The only catch is that the home builder wants input on our sale price and wants updates on any progress from showings and offers.

It’s obvious that the Canadian government wants to tighten up lending practices and get our debt levels down in case interest rates start moving up again.

For the most part I agree with the direction they’re moving, since it was their own loose policies of 40 year amortizations and 5% down payments that fueled the housing boom in the first place.  I just see these new regulations as a return to sanity.

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  1. Sustainable PF on January 17, 2011 at 7:36 am

    #1 and #2 don’t affect us in the least, however, I am very curious what the effects of #3 will be.
    “The Government will withdraw its insurance backing on home equity lines of credit”

    I best contact our bank to make sure I know what is going on with this one. We have a HELOC for our Smith Manoeuvre and potentially a small business opportunity. I hope these plans are kaputz due to this “change”.

    • Echo on January 17, 2011 at 11:13 am

      I guess the changes to HELOC’s won’t come into effect until April 18th, but I’m also curious to see what impact this will have on exisiting HELOC’s

  2. Echo on January 17, 2011 at 12:36 pm

    From Rob Carrick’s article in the Globe and Mail this morning –

    “The crackdown on lines of credit, effective April 18, will happen in the background. It affects lenders offering lines of credit and has no direct impact on borrowers. After providing lines of credit to customers, lenders can pool these loans and then obtain mortgage insurance for them.

    Now, the government is withdrawing its insurance backing of these lines of credit. Lenders will be on their own, and it’s reasonable to expect them to be a lot tougher about who gets one. As for people who already have home-equity lines of credit, Mr. Cocomile said they should be unaffected.”

  3. Financial Uproar on January 17, 2011 at 5:12 pm

    I would have liked to see the minimum down payment go up as well, but overall the changes are pretty minor. Pity all those suckers who took out 40 year amortizations back in the day. (As a former mortgage broker, I did a few!)

    • Echo on January 17, 2011 at 5:19 pm

      A 40 year amortization sounds like a “generational” mortgage to me…something I can leave for the kids 🙂

      Wow, they’ll let just about anyone become a mortgage broker!

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