It seems as though every April the government looks at tightening mortgage rules further and this year is no different.
During the past two years we have seen the following rule changes happen:
- The true $0 down mortgage was removed although we still have a way around this.
- The amortization on mortgages was reduced from 40 years to 35 years and then down to 30 years.
- Refinances were reduced from 95% to 90% and then reduced again down to 85%.
- Stated income mortgages were reduced from 95% financing down to 90% financing for self-employed people who cannot prove their income.
- Lines of credit & revenue property mortgages can no longer be obtained on high ratio mortgages where the customer requires more than 80% financing.
When you consider that all of the above occurred between April 2010 and April 2011 these are some pretty significant changes that the Government of Canada imposed on lenders and borrowers. This was done to try and impede the growth of consumer borrowing.
However, this plan has not succeeded and so the government is looking to further tighten rules again. We feel that this is a mistake on the government’s behalf as mortgage growth/home ownership is not the real problem. The real problem is unsecured debt. The rise in credit card/loan/line of credit debt is what will cause major problems down the road and not mortgage debt. Unsecured debt often comes at a much higher interest rate than mortgages and is usually set up on such low payments that it will take many years to pay it off. Given this, we feel the government should take a look at the ease with which consumers can get unsecured debt rather than borrowing against their homes.
The main rule change we have heard that is possibly coming down the pipe is that the government is looking to further reduce the maximum amortization on mortgages down to 25 years. If this rule comes into place this would mean that we went from having 40 year mortgages in 2010 down to 25 year mortgages in a 2 year period. This will have two possible impacts. It could possibly reduce the price at which people can buy a home. Secondly, it will drive more people to unsecured consumer debt as they will not be able to borrow against their homes.
While we agree that being debt conscious and living within your means is necessary we feel that by not looking at the unsecured debt situation, the government is missing the boat on a major source of the credit problem.
If you are looking to get a mortgage in the near future and are concerned about the maximum amortization being reduced then now may be the time to secure a pre-approval at the longer amortization in case the rules do change again this April. Rates are still at all-time lows with 4 year rates as low as 2.89% and 10 year rates being under 4%.