New Mortgage Rules: Are They Really What They Seem?
by Julie Jaggernath
With today’s announcement that certain mortgage rules for government-backed insured mortgages will tighten on July 9, the government tried to take another proactive step to protect Canadians from themselves. But, depending on who you talk to, opinions are mixed on whether or not these changes will result in the intended outcomes.
Maximum Amortization Reduced
Those looking for their first mortgage, or a bigger mortgage, are concerned that they will have more trouble qualifying for a 25 year versus a 30 year mortgage. In the long run they’ll pay less interest with the 25 year mortgage, but in the short term they will have to be able to afford slightly higher payments each month with already stretched resources.
Mortgage Refinance Restriction
People who typically refinance their mortgage every few years to pay off more expensive debt, like credit cards, will now only have access to a maximum of 80% of their home equity, not 85% (or even more in years past). The irony is that with housing values starting to correct themselves and even dip in some markets, home equity values may decrease, further limiting a home-owner’s access to equity to manage other debts and expenses.
Purchase Price Cap
For buyers in some of Canada’s most expensive markets, they will need at least 20% down if they want to buy a home for more than $1 million. A hard look at their circumstances is long overdue for these buyers and this change could force them to do that. But with that, demand and competition will likely increase for homes priced under the $1 million mark as buyers are faced not only with the purchase-price restrictions when they need a government-backed insured mortgage, but also with having to afford higher monthly mortgage payments because of the 25 year amortization rule.
Households Will Now be Able to Service More Debt
However, the final announced change today, which has been somewhat overlooked by many, has the potential to negate some of the positive outcomes that the government is trying to bring about with their attempts to cool the housing market. The government is now going to allow families to use more of their income for mortgage, housing and debt payments. They increased the allowable gross debt service ratio from 32% to 39% and the total debt service ratio from 40% to 44%. While each lender will ultimately decide if they will allow their clients to borrow up to these limits, at the end of the day they likely will in order to remain competitive.
Could Today’s Changes Encourage People to Use Their Credit Cards More?
The significance of increasing how much of someone’s disposable income they can use to service housing costs and debt payments means that without a hard look at their lifestyle and spending choices, they will end up using more of each pay cheque to pay their mortgage and housing-related costs, leaving less money for other expenses, emergency savings and retirement planning. With time and all that life brings someone’s way, this could ultimately mean the continued accumulation of consumer debt for a vast number of Canadians who not only aren’t sure how to change their credit-fuelled ways, but will face drastic consequences when interest rates rise if they don’t change.
Take Advantage of the Silver Lining
The silver lining, however, is that interest rates are still near historic lows. If Canadians get over their inoculation against household debt warnings and make changes to their spending behaviours, there’s still time to capitalize on low interest rates, pay down debt and get ahead. In short, if someone starts right now to improve their overall financial situation, they will make good headway before interest rates rise and start to slow them down.
Sink or Swim – You Choose
Just tightening up the rules for government-backed insured mortgages without helping Canadians learn how to budget, save and plan for the future is akin to throwing someone into a pool without first teaching them how to swim. While doable, they’ve got work ahead of them if they don’t want to drown.