A slight panic gripped through Canada late last week as Mr. Flaherty dropped the gavel on mortgage lending. For the fourth time in four years, we are facing more mortgage restrictions. Here is a quick summary of all the changes taking effect July 9th, 2012:
1) Maximum amortization reduced from 30 years to 25 years (this reduced amortization will increase your mortgage payment to the equivalent of paying roughly 1% more in your mortgage rate).
2) Refinances reduced from 85% loan to value to 80% loan to value (i.e. you can now only borrow up to 80% of the value of your home)
3) Minimum 20% down payment needed on homes valued $1 million and over
4) Gross Debt to Service ratio capped at 39%. (i.e. only 39% of your gross monthly income can be used to pay for the monthly principal + interest portion of the mortgage + monthly property taxes + 50% of the monthly condo fees)
5) Home Equity Lines of Credit limited to 65% of the value of your home. Some lenders will be able to capitalize a mortgage portion for another 15% and bring the value to 80%. More details to follow on this as more information comes in. For existing Home Equity Line of Credits, they are "grandfathered" with that 80% limit and will not be forced to reduce the balance owing to under 65% loan to value.
6) Cash back mortgages can no longer be used for down payment
These changes will take effect July 9, 2012.
If you have an accepted and binding purchase agreement signed and dated prior to July 9th, then you can qualify for the old guidelines and you will have up to December 31st to close your deal.
If you are refinancing, you have to have a firm approval in place prior to July 9th to qualify under the old rules.
The question that comes to mind is: Why such drastic changes and what does that mean for the majority of Canadians?? The government is saying they want to protect Canadians from taking on too much debt. Currently, the average Canadian is carrying $1.52 of debt for every $1.00 he/she earns. This is definitely a concern in Canada as we are nearing the debt levels in the U.S. when all their problems started.
These changes will make it more difficult to qualify for a mortgage, but they will also force many Canadians to carry higher interest rate debt by not allowing them to consolidate those 19% credit cards into their mortgage at a fixed rate of 3.09% as of today.
These changes will also have an effect on the home values. With fewer potential buyers, demand for homes will be less and that should bring down housing prices. Only time will tell to what extent.
Is the government really helping Canadians with these changes?? Mortgage debt allows us to reduce our debt to the lowest interest rate possible, especially when refinancing. Unsecured debt, on the other hand, is given out like candy and carries rates of 7% to 9% on lines of credit and between 19% to 29% on credit cards. I just received another "pre-approved" visa application in the mail this week from The Royal Bank. I've never banked there before, but yet they are willing to give me a minimum $5000 credit card, just by signing an application form.
These changes will only put more money in the pockets of the big banks that offer these unsecured credit accounts. It is true that we believe Canadians do need to get their debt levels under control and begin living within their means, but maybe the government should be tightening something other than the mortgage guidelines. How about tightening the ease that unsecured credit is given out and also capping the interest rate charged on these accounts to a more reasonable level.
Thanks for reading!
Your London, Ontario Mortgage Brokers at Dominion Lending Centres Forest City Funding FSCO# 10671