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Mortgage Rules not to Keep You Out, but to Keep You Thinking

22 January 2013

There’s been a lot of talk about how Mr. Flaherty and the rest of the Conservative government wants to keep as many people out of the housing market as possible. After all, they’ve shortened the amortization periods on insured mortgages to the point where it’s simply too expensive for a homeowner to take out mortgage insurance and still pay those higher monthly payments that a shorter loan life brings. Not to mention that we’re no longer allowed to borrow against our home as much as we were at the beginning of last year, and that home refinancing has changed.

Yep, Ottawa must want to keep us out of the market. Or maybe instead, they just want to make us think before shelling out all that dough for a home. Especially if you’re a first-time homebuyer.

It was this group that experts and analysts were most worried about when the new mortgage rules were first put into effect. Without the full 20 per cent down payment, buyers would need to take out mortgage insurance – which would in turn, force them to pay higher monthly payments at an amortization period of only 25 years instead of 30. First-time homebuyers are also the group most likely to need to save up for a down payment, as current homeowners can often dip into the equity in their home to gather a down payment.

In the past, it’s been relatively easy for first-time buyers to not be all that concerned about the down payment. If they didn’t have enough they’d just take out mortgage insurance. Yes it cost a bit more, but it was worth it to get that huge dream home, wasn’t it? Maybe then it was. But now that there’s the high cost of that insurance, as well as shortened amortizations resulting in bigger monthly payments, it’s just too much for first-time buyers to jump into. And that’s just what Ottawa was counting on.

Now, buyers – both first-time and long-time alike – are finding that they need to do what they should have been doing all along. They need to take a step back, take their emotions out of it, and decide on whether or not they can realistically afford that shiny, new home. The new rules are simply making buyers be honest about what they can afford, and what they can’t. With the huge cost of both insurance and monthly payments, buying more home than one can afford is just no longer practical.

Gregory Klump, chief economist at the Canadian Real Estate Association, agrees that the rules were made to mostly impact first-time buyers.

“[First-time buyers] are the ones that generally take out high-ratio mortgages,” he says. “Based on recent discussions with mortgage brokers and lenders, the way they characterize it, is that it’s a reality check for a lot of buyers in the market for what they could realistically afford. Don’t buy a home with granite counter tops. Don’t get in over your heads. We’ve had an unprecedented period of low interest rates and, to prevent a housing market bubble, he has tightened mortgage regulations.”

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