Thursday, March 10, 2011

New Mortgage Rules Coming on March 18th

New Mortgage Rules – What Do They Mean?

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There has been an ongoing conversation about good and bad debt in the news lately – is there a difference and how does it relate to Canadians’ personal situations? The mortgage meltdown in the U.S. and the all-time high consumer debt levels in Canada have also raised an alarm.

The Canadian government is now weighing in on the issue. Finance Minister Jim Flaherty recently made an announcement on new mortgage rules that serve the dual purpose of protecting the overall economy as well as nudging Canadians back towards lower personal debt levels.

What happened to the days of mortgage-burning parties? Not so long ago, it used to be a big point of pride to finally own one’s home. And by “own”, it was meant that not a penny was owed, unlike today when “owning” seems to mean living in a house with a mortgage, no matter how large that mortgage may be.

Mortgage Rule Changes

The Government of Canada’s mortgage changes impact both new and current homeowners. The three rules of the program are as follows:

Starting March 18, 2011:
  1. The maximum amortization period will be reduced to 30 years from 35 years.
  2. The maximum amount Canadians can borrow in refinancing their mortgage will be lowered from 90% to 85% of the value of their home.
  3. Starting April 18, 2011:
  4. Ottawa will withdraw government insurance backing on lines of credit secured by homes.

So what do these changes actually mean for homeowners and first-time homeowners?

First-Time Homeowners

First-timers will need to either buy a home with more money down, or one worth less than they could previously afford. The difference between a 30- and 35-year amortization on a $200,000 home can vary depending on the interest rate; nonetheless, the average extra cost for a homeowner is expected to be about $100 more per month. So they must either save more up front, increase monthly payments, or both. The Government of Canada is trying to ensure that more of these buyers own their homes sooner, lowering risk and the amount of debt they are carrying.

Refinancing Homeowners

Homeowners who are looking to refinance their homes, consolidate debt or make home renovations will not be able to access as much money as they did before. This is because, under the new rules, they will only be allowed to refinance up to 85% of the value of their home – down from the previous limit of 90%. This means that for a home valued at $200,000, refinancing it at 85% will allow the homeowner to access up to $170,000, while previously they would have accessed up to $180,000.

All Homeowners

The Government of Canada’s withdrawal of insurance on home equity lines of credit (HELOC) will likely mean an increase in interest rates at the banks. As the Government is no longer backing these loans, banks will need to bear more risk and it is anticipated that they will pass this on to homeowners in the form of higher interest rates.

As our government has taken a look at our finances and taken measures to restrain our borrowing, we too should be taking action. Assess your debt – good or bad – and make a plan to pay it off. The best debt, after all, is no debt – there can be no argument about that.

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