Three New Mortgage Rules in 2011

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.