New Mortgage Changes - What it means for Canadians!

Earlier his month the Canadian government announced several new mortgage measures aimed at protecting debt-burdened Canadians from getting even further in over their heads. What remains to be seen is how these changes will actually affect Canadians, the housing market and the economy in general.


Most of you are likely quite familiar with the pending changes by now but here is a quick summary.

The maximum number of years the Canada Mortgage and Housing Corporation will insure a high ratio mortgage will be lowered from 35 to 30 years; the maximum amount Canadians can refinance their homes will go from 90% to 85% of the home’s value, and CMHC will no longer insure home equity lines of credit.

So what does this all mean?

Shorter Amortization Period

Starting March 18, people buying a home with a down payment of less than 20 per cent will no longer have access to a 35 year amortization option with the new maximum now set at 30 years. While this will result in higher monthly mortgage payments for some, it will also result in tens of thousands of dollars being saved in interest charges. 

For example, someone paying todays 5 year fixed interest rate of around 3.89% on a $300,000 mortgage will now pay about $100 more each month because of the shorter amortization period.   The good news is that they will save about $40,000 in interest payments over the life of the mortgage which will also be 5 years shorter.

The shorter amortization will also affect purchasing power. A couple with combined household income of $120,000 and a 10 per cent down payment would have previously qualified for a home in the $600,000 range if amortized over 35 years.  Amortized over 30 years, the same couple only qualifies for a home in the $540,000 to $560,000 range.  This effect will be further magnified with the expected increase in interest rates in late 2011 and into 2012 as the shorter amortization options will create further affordability issues for Canadians.

The changes to the shorter amortization will also take some of the flexibility Canadians now enjoy with their monthly mortgage payments.  Some home buyers, especially first time buyers often sign up for a longer amortization period which comes with corresponding lower monthly payments to give them more flexibility to deal with the uncertainty of expenses often facing new home buyers.  The home buyers intent of course is to take the lower monthly payment with the intention of actually paying more each month when possible.  The problem begins when the well intentioned home owner finds that extra money going toward items like a new car loan, home renovations or paying off credit card debt, which inevitably keeps them from following through and putting any extra money toward their mortgage. 

Home Mortgage Refinancing

Those refinancing their mortgages have historically used the funds for home renovation projects and / or to consolidate higher interest credit card debt. The new Government measures will decrease the maximum amount they are able to withdraw from 90% to 85% of the home’s value, making it tougher for home owners to access funds in this manner.

While the Government is said to be acting on behalf of Canadians to help prevent Canadian households from getting overextended, some are suggesting that the change to lower refinancing limits could have the opposite effect.  The thought is that by limiting access to refinancing funds, it may actually encourage those who are already in debt and cannot control their spending habits to continue to borrow on higher interest rate credit cards or other similar options actually making the problem worse. 

Home Equity Lines of Credit

When Finance Minister Jim Flaherty unveiled the new measures governing mortgages and home equity lines of credit a couple of weeks ago he bemoaned the fact that some Canadians are using HELOC’s “to buy boats, cars and big-screen TVs instead of paying for home renovations and building equity in their homes”

Mortgage-backed lines of credit were originally intended to help people make improvements to their homes. According to a household borrowing survey done in 2010, only 25% of the funds accessed through home equity lines of credit were actually being used for home renovations. The rest went toward paying for vacations, buying cars, daily spending and consolidating debt, which might explain their increasing popularity of late. 

The decision to stop insuring home equity lines of credit will put the burden on the lenders themselves to lend responsibly, basically leaving banks to cover their own losses from customers with lines of credit.  Of course the banks will undoubtedly cover themselves by passing the risk on to consumers in the form of higher interest rates paid on Home Equity Lines of Credit and by limiting access to these funds to only their best credit worthy clients.

Unlike the first 2 measures which take effect on March 18^th, the changes to the home equity line of credit do not come into effect until April 18^th, one month later.

Short and long term effects on the housing market and the economy

You would be hard pressed to find too many people who would agree on how these latest changes will affect the housing market or the economy in general, but here are some thoughts. 

Some feel the Government changes will further cool what is believed to be an already-cooling housing sector.  Coupled with expected interest rate hikes in the latter part of 2011 and beyond these changes could further dampen buyer enthusiasm. 

With the changes still a couple of months away, some home buyers may be tempted to move quickly to get ahead of rising interest rates and to qualify for the longer amortization period if needed before the new changes come into effect.  With winter typically being a slower period for residential real estate agents this could provide some welcomed traffic from motivated home buyers.

The changes limiting access to home equity lines of credit and decreasing the amount available with refinancing may also result in decreased consumer spending on big-ticket items, like cars and home renovations.  Any significant drop-off in spending in these areas could certainly have a negative impact on the economy in general. 

The Department of Finance’s primary concern is that people are borrowing to the maximum at a time of low interest rates which could lead to problems in managing their debts when interest rates go up.

While the new rules may initially keep some potential homeowners out of the housing market and slow the economy, it will also hopefully result in the Governments intended goal of improving the financial health of Canadian households over the long run.

Domenic Mirabelli
Lic #M10000364
416.303.4480
domenic.mirabelli@migroup.ca
www.thescooponmortgages.com 

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