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Mortgage rules focus on stability
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.”