Finance Minister Jim Flaherty has announced new mortgage regulations aimed at reducing Canadians’ household debt.
Flaherty has unveiled three new rules:
- Mortgage amortization periods will be reduced to 30 years from 35 years.
- The maximum amount Canadians can borrow to refinance their mortgages will be lowered to 85 per cent from 90 per cent.
- The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit.
The rules are aimed at encouraging responsible lending and borrowing and encouraging people to increase their home equity. Although the long term impact may prove beneficial to Canadians the immediate impact on the housing market will be felt:
- Shorter amortization periods will reduce the number of first time home buyers in the marketplace
- The inability for homeowners to refinance high rate credit card debt into low rate mortgage debt creating more insolvency and subsequent mortgage defaults
- The greater potential for “orphan mortgages”, or simply the inability to refinance an existing mortgage where there may not exist the required 15% equity in the home. With an ability to purchase a home with only 5% down, a potential shortfall exists should the consumer be required to seek an alternative lender prior to accumulating 15% equity.
Although the intent of the new mortgage regulations is to improve the financial situation of households in Canada, you can expect a softening of the real estate market and more power of sale situations created as a result of this legislation.
Consumer education not legislation would have been the more prudent strategy.
I will keep you updated as we see how the mortgage industry reacts to this announcement.
We welcome you comments.