Monday, January 17, 2011

Mortgage Rules Getting Tougher: Canadian's Piling on More and More Debt.

Mortgage rules in Canada will be getting tighter this year. With Canadian families piling on more and more debt, due partially to historically low interest rates, the Canadian Finance Minister announced that there will be a few changes to make it more difficult for Canadians to accumulate higher debt levels.

Firstly, the maximum amortization period, or the length of time that it will take to pay off your mortgage, will be reduced from 35 years to 30 years. This will have the effect of increasing a $1300 per month mortgage to about $1400, or by about $100. But it saves big money on interest payments if you consider that a family would now own their home a full five years sooner.

Secondly, the refinancing limit will be lowered to 85% of the home's value from 90%. This is a great idea as it helps decrease the common practice of people using their homes as a massive ATM machine for frivolous discretionary purchases like furniture, electronics, and aesthetic renovations. Also, considering it is always possible for house prices to fall, owing 90% of the property's value does not leave much room for failure... and that is what primarily lead to the U.S. housing crisis, during which the bank's repossessed home's that were not even worth the amount of debt owed on them.

These changes will come into force on March 18th, so there is still some time for Canadians to satisfy their appetite for higher debts and grab that 35 year mortgage. But after that, Canadians will be just a little more protected from their own stupidity. Statistics Canada now reports that the average household now has a debt load 148% of their income!! And amazingly, that number is now higher than it is in the United States, which is traditionally seen as a basket case when it comes to household finances.

To be sure, in addition to their mortgage, the average Canadian now has over $25,000 in consumer debts, or debts accumulated for consumer and not investment purposes. Sadly, the trend toward higher debts is increasing, but thankfully the Canadian government is carefully watching this trend before it leads us into an economic crisis. The positive side of this news, however, is that it should prevent the Canadian government from being forced to raise interest rates in the near-term, which was definitely becoming a possibility... and could lead to disaster for anyone on a variable rate mortgage.

1 comment:

  1. Great article, I find it interesting how much tighter the rules have come since 2008. The fall of the 0% down, 40 year mortgage will not be seen again. I am curious to see whether this will lend to Canada mirroring Scandanvian houses, where home ownership takes more then a generation to achieve.