New mortgage rules take effect

Taken from the Guelph Mercury

GUELPH — Tighter federal mortgage rules intended to stem Canadian household debt kicked in Thursday, but local realty and mortgage specialists said the changes won’t have much impact.

Starting today, the maximum amortization period for a government-backed, insured mortgage drops from 35 to 30 years. It had been at 40 years in 2008.

Also, the maximum amount Canadians can borrow in refinancing their mortgages falls to 85 per cent of the value of their homes, from 95 per cent a little more than a year ago.

One month from today, the government will implement a third measure, eliminating guarantees on home equity lines of credit.

Federal Finance Minister Jim Flaherty announced the changes in January, one month after the debt-to-income ratio in this country reached an all-time high of 148 per cent. The rules are designed to discourage homeowners from dipping into home equity to pay for things such as cars, electronics or second homes.

This week, however, local mortgage and real estate specialists expressed doubt the new rules would impact the market.

“It’s really not going to make much of a difference,” Jennifer Lovsin, president of the Guelph and District Association of Realtors, said. “People are just going to go out and get debt anyway.”

If the government wants to get serious about curbing consumer debt, Lovsin added, it should stop credit card companies from lending at exorbitant interest rates.

While homebuyers will still have to qualify for a 25-year amortization, heavily indebted mortgagees who need help on a short-term basis will have less wiggle room, she said.

Chris Bisson, a broker with the Mortgage Centre in Guelph, said while the new amortization rule will only affect about five per cent of homebuyers, it won’t hurt, either.

“Generally the shorter the amortization, the faster people pay off their mortgages. Any time someone can pay off debt faster, it’s a good thing,” he said.

He also welcomed the refinancing rule, which he hopes will discourage people from “using their house as an ATM machine.”

Local real estate agent Don Huggins also welcomed the stricter mortgage rules, adding household debt “needs to be reined in.”

When he bought his own house, mortgage rates were at 14 per cent, he said. “Now, money is really, really cheap. Our interest rates are really low.”

But the new rules won’t have much impact on the local housing market, he said, which he predicted will remain hot due to a tight housing supply, and good weather.

To address the lack of financial discipline in this country, Huggins suggested the feds regulate lines of credit, another source of consumer debt.

Bisson agreed lines of credit are a problem, and also suggested the government scale back the maximum gross debt service ratio from its current ceiling of 44 per cent. “You’re setting people up to get into credit problems when you’re allowing them that extra amount,” he said.

Many predicted a buying frenzy ahead of the changes, as happened a year ago before Ottawa raised the minimum down payment on rental properties and Ontario and B.C. implemented the Harmonized Sales Tax.

However, after a strong start to the year, national home sales edged down in February, according to the Canadian Real Estate Association. “The reality is that we’ve had a good spring,” Bisson said. “But I don’t think it’s nearly as strong as it was last year as a result of the changes.”

COLUMN: Tougher mortgage rules make sense

January 25, 2011 8:00 AM

By: reporter@nanaimobulletin.com

I bought my first house – a tiny little townhouse in the University District (formerly known as Harewood) – four years ago.

I didn’t just decide on a whim one day to buy my own place.

I had a down payment saved up that was well above the minimum requirements.

It was always my dream to have a home of my own and I saved for years to make this dream come true. The place I bought needed a lot of work and because it is an old house, things continue to need fixing each year.

But I didn’t want to get in over my head.

I opted for a small, badly-cared-for townhouse that I could fix up myself because it meant my mortgage would not be as big, allowing me to still live and do some of the things I enjoy, like going out for dinner with friends and mountain biking.

The interest rate I secured was pretty low – although not as low as rates are now – and I could keep my repayment schedule down to 15 years.

But while borrowing money over a 15-year period, despite a sizeable down payment, was still an angst-ridden venture for me, some of my friends will be paying off their debt for the next 35 years or so.

Some people I know (my Vancouver friends) owe thousands and thousands of dollars, even though they bring in fairly modest incomes.

They have bigger houses than I do and fancy, new cars.

Many of them put barely a penny down on their houses and cars to begin with.

Some even take out loans to buy furniture and appliances and have several cellphone contracts – after all, who doesn’t need a Blackberry and an iPhone?

And they still go out for dinner and vacation in Mexico or the Caribbean, even though this means they never put down anything extra on their mortgage payments at the end of the year.

I hope the federal government’s new mortgage rules help to curb this kind of excessive borrowing.

It doesn’t make good financial sense.

How many thousands of dollars in interest are these people giving to banks?

Wouldn’t they be farther ahead in the long run if they wait until they have a certain amount saved before plunging in?

Due to concerns about the amount of debt Canadians are taking on, federal Finance Minister Jim Flaherty cut the maximum amortization period from 35 years to 30.

The rules also lower the amount Canadians can borrow on the value of their homes, from 90 per cent to 85 per cent, and there will also be tighter rules on lines of credit secured by homes.

This follows the federal government discontinuing the zero-down payment and 40-year mortgage amortization in October 2008.

The new rules are aimed at putting a damper on soaring household debts and supporting the long-term stability of the Canadian housing market.

People are borrowing too much these days, and if these rules reign in these borrowing habits, I’m all for them.

It seems that many people borrow just because they can in an enjoy-now, pay-later type of attitude.

What happened to saving up and buying a house when you actually have the money (or at least a decent-sized down payment to put toward it)?

I know I enjoy things more when I work hard to achieve them.

It’s time to go back to the days of saving up for the things you want.

Perhaps a move back to saving for items (and not having as many things) will also make people think harder (and more realistically) about their big ticket purchases.

Mortgage Rules Focus on Stability

By Chris Hamlyn - Nanaimo News Bulletin
Published: January 28, 2011 3:00 PM 
Updated: January 28, 2011 3:12 PM

Homeowners have to focus on the future and long-term stability when dealing with federal government changes to residential mortgages.

Beginning March 18, the maximum amortization period for government-backed insured mortgages is 30 years, down from 35 years, and the maximum amount Canadians can borrow in refinancing their mortgages is 85 per cent, down from 90 per cent.

On April 18, the government is withdrawing insurance backing on home equity lines of credit to ensure associated risks are managed by financial institutions and not taxpayers.

This follows April 2010 changes that included: borrowers meet the standards for a five-year fixed rate mortgage; a minimum down payment of 20 per cent on the purchase of rental property; and lowering refinancing maximums to 90 per cent from 95 per cent.

Kim Ross, a mortgage specialist with TD Canada Trust, said the 30-year amortization will require a higher monthly payment and a higher gross income to qualify but is offset by lower Canada Mortgage and Housing Corporation premiums, significant savings in interest over the amortization period and payout on a mortgage five years early.

She said looking at the big picture, the rule tightening is good for the average Canadian but they must think long-term.

“The average borrower is thinking their monthly payment is going to be higher. They’re looking at immediate ramifications,” she said. “The government is looking at the big picture, looking all the way to retirement.”

She said comparing 30-year amortization to 35-year, the difference in payments would likely be close to $100 where savings in interest could be in the thousands of dollars.

“For people who solely focus on the increase in payments, yes we need this tightening,” she said. “If one hundred dollars more a month is going to make or break buying a house, people need to rethink their situation.”

Cliff Moberg, past president of the Vancouver Island Real Estate Board, said he hasn’t noticed a great deal of public interest in the changes.

“The biggest thing we see from all of this is the reduction in amortization will make a difference to first-time buyers trying to qualify to get into a property,” he said. “It will probably shut out a percentage of first-time buyers, albeit a fairly minute number.

“Government didn’t increase the down payment requirement which would have had a huge impact.”

Ross said Canada has been conservative with its lending and these changes are a prime example of the efforts to slow the pace of household debt and keep Canadians from the issues facing the U.S.

The best advice for borrowers is to be informed.

“Do your homework, get pre-approved and know what your affordability is before you buy a house,” she said. “If you look at the average Canadian compared to 10 years ago, our debt ratio today is huge.”