Federal Finance Minister Jim Flaherty has expressed continual concern that Canadians are carrying too much debt and had been warning that mortgage rule changes were to be expected. He was true to his word as shown by his most recent announcement changing mortgage regulations.
According to Statistics Canada, the ratio of household debt to disposable income stands at 152 per cent. Much of the debt has been incurred by Canadians taking advantage of historically low interest rates.
Flaherty announced a reduction in the maximum amortization period from 30 years to 25 years on Canada Mortgage and Housing Corporation (CMHC)-backed insurance for mortgages on homes with loan-to-value ratios of more than 80 per cent. In 2008, it had been 35 years and then was reduced to 30 years last year. In addition, the maximum a Canadian householder can borrow is 80 per cent of their home’s value, which is a reduction from the previous 85 per cent.
The government further fixed the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent. The minister said the lower ratio will better protect Canadian households that may be vulnerable to economic shocks or increased interest rates.
Also, CMHC will no longer be insuring homes valued at $1 million or more.
The new rules take effect on July 9.
“We believe the announcement (by the finance minister) is a measured response to the government’s often stated concern about household debt levels and the housing market,” said Wayne Moen, the president of the Canadian Real Estate Association (CREA).
“That being said, we would remind the government that the re-sale housing market makes a significant contribution to the economy, adding an estimated $20 billion in spin-off spending and over 165,000 jobs in 2012.
“The impact of these measures ... must be closely monitored to ensure they have the anticipated impact and don’t create a spillover effect and slow the economy,” Moen warned.
Flaherty said the adjustments being made were “introduced to keep the housing market strong, and help to ensure households do not become overextended.”
He said the changes since 2008 in the amortization period has saved $150,000 in borrowing costs over the life of a $300,000 mortage.
On the other hand, the lowering of the amortization period to 25 years means an extra monthly payment of $150 on a $300,000 mortgage.
For first-time home buyers, it is equivalent to a one-per-cent hike in interest rates.
It is estimated that five per cent of potential first-time home buyers have now been shut out of the housing market as a result of the new regulations. Overall, the regulation changes have the effect of shrinking the available borrower pool.
CREA said the new rules were announced at a time when the resale housing market was “balanced” across Canada, indicating there was no real need to put a break on the housing market.