Today, Finance Minister Jim Flaherty announced new mortgage regulations aimed at reducing soaring household debt for Canadians. The International Monetary Fund has called household debt to be the No. 1 risk to the Canadian economy.

The three new mortgage rules:

1. Mortgage amortization periods will be reduced to 30 years from 35 years.
2. The maximum amount Canadians can borrow to refinance their mortgages will be lowered to 85 per cent from 90 per cent.
3. The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit.

“This will prevent Canadians from taking on excessive debt,” Flaherty told a news conference, noting that Canadians in some cases are re-mortgaging their homes to buy boats and other large ticket items instead of reinvesting in their homes.

The ratio of household debt to disposable income has reached an alarming 147 per cent and household debt has reached $1.4 trillion. These new Bank of Canada rules are meant to curb this domestic debt burden.

The first change is likely to have the largest impact. Buyers who purchase a home with less than 20 per cent of the value of the home are required to purchase government-backed mortgage insurance through Canada Mortgage and Housing Corporation.

Under the new rules, mortgages amortized over longer than 30 years will no longer qualify for that insurance, making it effectively impossible to get a highly leveraged mortgage of more than 30 years in Canada.

Thankfully, the new rules do not include an increase to the five per cent minimum down payment Ottawa requires for a home purchase.

The new mortgage rules are both good and bad news, in my opinion.

Good news for people who do not understand the difference between ‘good debt’ and ‘bad debt’. These people love taking more and more debt, of what I call bad debt (investing in depreciating assets-cars, boats, large ticket items etc.) and borrow to max.

Bad news for prudent investors who have always used times like this (historically low interest rates) to take on ‘good debt’ and invest (in appreciating assets-real estate, stocks, mutual funds, gold etc.) In the case of a ‘good debt’, sometimes it possible to write off interest payments also.

These new rules will help to control such excessive borrowing, whether good or bad debt.

For some sound financial education visit: Get Smarter About Money

If you want to invest in Mississauga real estate, call me for friendly real estate advice. I can also put you in touch with financial, mortgage and or tax advisors who can help evaluate your goals, before you borrow to invest.

When shopping for a home mortgage loan, any other loan or to rent a property, lenders/landlords would like to know your credit score.

Credit score is important in many ways, it not only helps you secure a loan (based on your income qualifications) but also helps to get you better interest rates, if you are shopping for one. Your personal credit history is compiled by credit bureaus which collect information from various sources including banks, retailers and other public records, creating a credit report. Information such as: what credit and debit cards you have, the types of accounts you have at various financial institutions, information about personal loans, mortgages, student loans, etc., is all part of the report. 

The report shows the creditors’ names, account numbers, the date accounts were started, the current balance as well as a detailed payment history (for example: how many times you were over 30, 60, or 90 days late in paying bills). Generally, credit reports show information going back six to seven years. The report will also show public information, for example, marriages, divorces, liens, judgments that have been entered against you, bankruptcies, etc.

Read more about credit check

One must check once credit file once a year by calling credit bureaus at no cost. It does not hurt your score.

Shopping for Canada’s best mortgage rates?

There is no doubt that teaser interest rates being offered today are fuelling the GTA housing market. When these historically low rates are history in the next few years, the borrowers will be forced to renew at double or triple the cost.

Below strategies can be helpful in lowering your principal amount of your mortgage.

If you also think that the rates are at a their lowest point ever, you may want to guarantee these rate as long as possible, going with a long term (5 years, 7 years, and 10 years) might make sense.

Take advantage of the lower rate for as long as possible, and remember, if you sell your property, you can take the mortgage with you to your new property or have someone assume your mortgage (bank approval is required). It could prove to be a great selling feature if you have an assumable mortgage at a low rate. A word of caution with the fixed rate mortgages: if your decide paying off the mortgage early (before the end of the term) you can be liable not only to an interest differential penalty based on the higher rate.

Here are some tips that can help pay down your mortgage sooner.

Reduce amortization period

One way to pay off your mortgage faster is to opt-in for a shorter amortization period, that is the number of years it would take to repay the entire mortgage based on a set of fixed payments. The longer the amortization, the more interest is paid over the life of the mortgage. Therefore instead of paying off your loan in 35 years (420 months); you can choose shorter amortization period of 25 year (300 months), 15 year (180 months) or even lesser. Make sure that the mortgage payment (principal + interest) does not hurt your monthly cash flow. Don't forget to add property taxes and utility charges to your monthly home expenses.

Pay bi-weekly or weekly mortgage payments

Once you know the mortgage amount, rate and amortization period, your monthly payment can be calculated. Now is the time to decide how often you want to make your payments, because by selecting the right payment frequency could literally mean thousands of dollars in long term savings. You can save more by paying weekly or bi-weekly in comparison to paying monthly.

If you have other payments throughout the month, bi-weekly may be less stressful and easier to budget. If you are self-employed or commissioned, and your income varies greatly from week to week, it may be easier to pay monthly and use your prepayment privileges to knock the amortization period.

Pre-payments-Pay extra payments against principal

This is one of the most important features to look for. Having the prepayment privilege that works for you could mean a difference of thousands of dollars over the life of your mortgage. Although all financial institutions offer some form of prepayment privilege, the amount and how it can be applied varies from one to another. Some Banks offer as high as 20% per year. Ideally, you should work your prepayment privilege as often as possible throughout the year.

Increase your regular payment

The secret to borrowing is borrow early in your life. The reason is that the future value of the dollar decreases. When you borrow early, your payments are set. As time goes, your incomes increase, but your mortgage payments stay the same, provided you locked-in to a long term, fixed mortgage. Therefore, in the future you may be in a position to increase our payment on your mortgage, regardless if you are paying weekly, bi-weekly, or monthly. Any increase in payment is directly going to pay down the mortgage, thus saving you thousands down the road due to the effect of interest not compounding on that amount for the life of the mortgage.

Double-up on your payments

A few lenders will allow you to double-up on your payments, and the extra payment goes directly toward the principal. This is a neat feature for someone who prefers monthly payments but wants the results of weekly and bi-weekly payments.

Early renewal mortgage option

This is a great feature to have when interest rates are on a rise. If you are locked-in to a term and the mortgage will be maturing in months or years down the road, and the mortgage rates are on a rise, you can renew your mortgage before the maturity and lock-in the low rates for a new term.

Port your lower rate mortgage and avoid mortgage penalty

If you want to take your mortgage with you when you move, you can, if your mortgage has a clause that allows you to do that. This option allows you to continue your savings on your lower rate if the going rates are higher, as well as avoid any penalties if you were to break that mortgage. If you need a larger mortgage for the new property, your existing mortgage amount might also be increased. As for the associated costs, since a new mortgage document must be registered on title, legal fees and normal appraisal fees would be applicable.

Let sellers assume mortgage

If you are moving and don't want to take your mortgage with you, or you are selling and not buying, an assumable feature can allow the buyers of your property to take over the mortgage, provided they meet the lender's qualifying criteria. By doing so, you will not pay any penalties as you are not breaking the mortgage contract. In fact, if your interest rate is lower than those available at the time, your assumable mortgage suddenly became a great selling feature for your property.

A word of caution here: Just because someone assumes your mortgage does not necessarily mean you are off the hook for the responsibility. You must get a release from the lender to ensure that you are no longer liable for it. Some mortgage lenders automatically offer a release, but with others, you must make the request, and do it through your lawyer.