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?

Today, Canada ‘s Finance Minister Jim Flaherty announced new housing rules. These rules will make it more difficult for people to qualify to buy new homes. These rules break down into three types:

First Time Home Buyers: The government plans to mandate that all borrowers meet standards for a five-year fixed-rate mortgage, even if they opt for a loan with a lower rate and for a shorter term. This will help prepare buyers for higher rates ahead. Roughly speaking, home buyers can end up paying approx. $250 more in monthly mortgage payments on a $200,000 home, if the interest rates went up by mere two percentage points.

Existing Home Buyers: The maximum amount that can be withdrawn in refinancing a mortgage has been cut down to 90% from 95%.

Real Estate Investors: A minimum down payment of 20% will be required for government-backed mortgage insurance on properties bought for speculation. This rule is aimed at discouraging would-be real estate speculators; ones with less than 20% down payment, to own multiple properties beyond their primary residence.

“Canada’s housing market is healthy, stable and supported by our country’s solid economic fundamentals,” Flaherty said. “However, a key lesson of the global financial crisis is that early policy action can help prevent negative trends from developing.”We want to discourage the tendency some people have to use a home as an ATM, or buy three or four condos on speculation,” Flaherty said.

I personally welcome the government’s move and feel good that these rules came in the nick of time. The recent low interest rates encouraged many buyers to take out big mortgages/buy homes they couldn’t afford if rates were more. If this was not done, we could have risked some sort of a housing bubble, similar to the housing crisis in the United States. In July 2008, Canadian government had made a similar move and abolished zero down payment rules.

Going forward, one expects fewer buyers qualifying for home loans. Fewer buyers will help ease multiple offer scenarios, and with better supply of homes (new listings), home prices might stabilize. Real estate investors will also find more number of renters in the market place.

If you are planning to buy, sell, rent or invest in today’s market call me for some prudent real estate advice.