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Mortgage Rules Tightened Again

21 June 2012

After experts have been calling out for the past several months on stricter rules on mortgages, Ottawa has made them. On Wednesday, Finance Minister Jim Flaherty announced that for the fourth time in four years, mortgages in Canada are changing.

The first new rule announced was that amortization periods on government-insured mortgages would be reduced from 30 years to 25. Insured mortgages are those that have less than a 20 per cent down payment; and this move will likely eradicate the 30-year mortgage for most Canadians.

This move will mean that anyone seeking an insured mortgage will not only have to pay more for the mortgage with the added insurance costs; but also that their monthly mortgage payments will be higher. While this could put a squeeze on some in the short term, it helps Canadians hold more equity in their home faster; and it also brings them that much closer to being mortgage-free much quicker.

Another change that Ottawa has made is on home equity lines of credit (HELOCs.) As it stands now, lenders can loan up to 85 per cent of the equity in a person’s home; that will be changed to 80 per cent.

Although Jim Flaherty unofficially announced these two new changes yesterday, he’ll officially make them at a conference today. Along with these, it’s also expected that he’ll announce two more changes as well. The first will be restricting high-ratio mortgages over $1 million; and the second will be capping the debt-to-income ratio at 39 per cent. Typically, homeowners want this number to be around 35 per cent, and banks would usually never consider lending to someone who’s ratio was higher than 40 per cent. However, this is the first time actual standards will be put into place.

Many thought that when the next round of mortgages came about, Jim Flaherty would do something about the required down payments – and hopefully, bump them up from the minimum five per cent where they currently stand. However, there is most likely a reason why that change wasn’t made.

“The fact that they didn’t change down payments is a realization that doing so would probably be too severe given that the market is slowing down,” says Benjamin Tal, CIBC economist, when describing the newest changes as the “gentle push” the housing market needed.

However, not everyone is in agreement that these changes are for the better. Jim Murphy, CEO of the Canadian Association of Accredited Mortgage Professionals says, “All of these things might precipitate the housing market downturn that the government wants to avoid.”

Just when these new changes will be put into place is unknown; but they are coming and most likely, fairly soon. All other mortgage changes were put into effect about 60 days after they were announced.

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