The Canadian housing market has been hot for awhile now, and there is speculation that the real estate bubble will pop soon. The government seems to be on a quest to cool things down and Finance Minister Jim Flaherty seems to be relishing the role of slowing things down a bit. Yet again, he is changing the rules when it comes to mortgages insured by the CMHC.
What are the New Rules?
Starting on July 9, government backed mortgages will have a maximum amortization of 25 years, down from 30 years. Additionally, you can only take out 80 per cent equity when you refinance, as opposed to 85 per cent. This will make it a little harder to get into more debt than you can handle, at least when it comes to your mortgage.
There are have growing concerns in Canada about the growth of household debt, and what an over-leveraged consumer base could suffer if the global economy tanks again. Additionally, there are hopes that the move to reduce amortization (automatically forcing many borrowers into higher monthly payments) will help reduce home prices. Borrowers are expected to look for lower priced homes, since the shorter amortization period means that they might not be able to afford the higher payments on a higher priced home.
In economic terms, this move is a lot like raising mortgage rates a little less than one percentage point. The Bank of Canada hasn’t been quite ready to raise rates and curb the economy, and this is one solution that might help Matt Carney avoid the need to raise rates. The new rules help limit debt, are likely to keep home prices in check, and allow monetary policy makers to keep benchmark rates lower in order to encourage economic growth.
Refinancing debt should also be reduced. Instead of being able to tap 85 per cent of the equity in your home, you can only tap 80 per cent. That means if you have $100,000 of equity, you can only tap $80,000 of it, instead of $85,000. That’s a $5,000 difference in how much debt you end up with. For those who have been concerned about growing levels of Canadian debt, though, these changes are being welcomed, even if it means a slight reduction in spending power.
How Much has Canadian Debt Grown?
While the rate of household debt is slowing in Canada, in late 2011, Canada surpassed the United States in per capita household debt. That’s a pretty significant milestone. And, even though Canada’s economy has weathered the recent storm fairly well, there are plenty who are not convinced that the worst is over. At the very least, there could be another setback.
Since Canadians have been growing their debt levels, they are more exposed to a possible downturn. The move to try to curb some of the additional debt that Canadians might see is one that could potentially help prevent widespread problems for consumers as a result of high debt and difficult economic conditions.
What do you think of the new mortgage rules? Do they make sense? Will they affect you?