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The Canadian Federal government tightens mortgage rules again

Blog by Morgan DuVernet & Kelsie Struch | January 17th, 2011

Finance Minister Jim Flaherty is cracking down on Canadians' ability to qualify for a mortgage, in the government's latest attempt to rein in consumer debt.

As reported earlier today the Canadian Federal Government has imposed new mortgage regulations for borrowers.

What I believe the federal government is trying to achieve by imposing these new regulations is to shelter the Canadian housing market from a financial crisis like we have seen in past years in the Unites States. These regulations will help to ensure home owners don’t leverage themselves to high.

Please read the article published on Postmedia News earlier today with the details on these new regulations.

As always, if you have any questions about these new regulations or the Vancouver Real Estate market please feel free to contact me anytime

Morgan DuVernet
Century 21 In Town Realty

OTTAWA — For the second time in less than one year, the federal government has tightened rules around mortgage financing amid growing concerns about how much personal debt Canadians are taking on —_a move that could add an estimated $100 a month in carrying costs for future homeowners and price others out of the real estate market.

The changes could also affect about 20,000 home sales in 2011, analysts say.

Finance Minister Jim Flaherty announced Monday the government is reducing the maximum amortization period for government-backed mortgages to 30 years from 35 years. The change will affect mortgages with loan-to-home-value ratios of more than 80 per cent.

As well, Canadians will only be able to refinance up to 85 per cent of the value of their homes on government-back mortgages, down from 90 per cent.

In addition, the government will no longer insure home-equity lines of credit, or HELOCs.

Adrienne Warren, senior economist at Bank of Nova Scotia, said the impact of the change to amortization would be relatively modest, at about $100 more per month in carrying costs for an average home. Nevertheless, "it could price some people out of the market at the margin, but it suggests (Canadians) will have to take on smaller debt than they otherwise would."

The tightened mortgage and refinancing rules take effect March 18. Under federal law, lenders must obtain mortgage insurance when homebuyers make a downpayment of less than 20 per cent on the purchase price of a home. The government then backs the insured mortgages. The new changes apply to such government-backed mortgages.

The minimum downpayment on a home is unchanged at five per cent.

The withdrawal of government insurance on HELOCs takes effect April 18.

"Taxpayers should not bear any risk related to consumer debt products unrelated to house purchases. Those risks should be managed by the financial institutions that originate and offer these products," Flaherty said.

Pascal Gauthier, senior economist at Toronto-Dominion Bank, said the amortization change could affect 20,000 home sales on an annualized basis, with the average home price likely to weaken by two per cent this year or slightly more than TD had forecast.

Still, Gauthier said the changes gave TD no reason to lower its current forecast calling for home sales in the country to decline by about eight per cent this year from last, along with a one per cent drop in home prices.

As for the withdrawn support on HELOCs, Gauthier said "a significant slowdown in household-debt accumulation" had already been expected independent of the new federal rules. As well, he said less than one-tenth of mortgage refinancings are big enough to be affected by the five-point reduction in the maximum loan-to-home-value ratio.

Michael Gregory, senior economist with BMO Capital Markets, however, said the restriction on the mortgage amortization period "is a significant change" for new homebuyers who lack the equity backing of a previously owned home.

"First-time homebuyers tend to be stretching things a little bit more," he said in an interview. "They don't have the equity one would have rolling up from another house, and therefore tend to borrow a little bit more relative to their incomes."

Gregory produced data showing that the average homeowner with a new mortgage worth $300,000 and an annual interest rate of five per cent would pay $96 more, at $1,610 a month, with 30-year amortization period than at 35 years.

In February 2010, Flaherty announced moves to toughen mortgage rules amid worries that Canada was in the midst of a housing-market bubble. The reforms, since introduced, compelled borrowers to meet standards for a five-year, fixed-rate mortgage, even if the buyer wanted a shorter-term, variable rate loan.

They further required purchasers of rental properties to issue a 20 per cent down payment as opposed to five per cent.

The federal Liberals on Monday said the Conservative government was trying to correct some of the mistakes it made before the recession and U.S. subprime-mortgage crisis. The Liberals pointed out the move in 2006 to allow for zero-down-payment mortgages and increase the maximum amortization period to 40 years from 25.

"The Conservatives are scrambling to close the barn door after the horses have already bolted, and today's announcement is an admission by minister Flaherty that his policies helped create the personal debt crisis faced by Canadian families," Liberal finance critic Scott Brison said in a statement.

—With files from Paul Vieira, Financial Post


New federal mortgage rules:

- Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent, effective March 18.

- Lowers the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes, effective March 18.

- Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs, effective April 18.

Increase in monthly payments after cutting amortization period to 30 years from 35 years on a $300,000 mortgage:

- At three per cent interest, $1,265 (+$110)

- At four per cent interest, $1,432 (+$104)

- At five per cent interest, $1,610 (+$96)

- At six per cent interest, $1,799 (+$88)

Source: BMO Capital Markets