25 Year Amortization
One of the major changes announced today was the reduction in amortizations to a maximum of 25 years – a tightening measure that some are up in arms over. This is simply a return to Canada was just a few years ago, before the federal government stepped in to jump-start the real estate market with the introduction of 35 and 40 year amortizations. This particular rule change will help Canadians reduce mortgage interest charges over the term of their mortgage and also help you grow equity wealth faster.
Debt Servicing Ratios – Utility Costs and Condo Fees?
The Canadian government will also be reducing the maximum debt servicing ratios (what allows you to qualify for your mortgage) from 44% to 39%. In an effort to address the antiquated monthly estimates used for utility costs that have sky rocketed over the years, this is a prudent change. Having said this, I’m still puzzled to this day why only 50% of condo fees are used for qualifying calculations when the Federal Finance Minister is so deeply concerned about the Toronto condo market as he mentioned in his news conference this morning. This is a missed opportunity to deal with both misguided qualifying variables and the major concern prompting these changes.
Capping Mortgage Insurance
The capping of the maximum insured mortgage at $1,000,000 is long overdue. There was a time in the late 1990’s where the cap on insured mortgages in Toronto and Vancouver was $300,000!!! I was never sure why this cap was lifted by CMHC in the first place but I would hazard to guess that this was the beginning of the end of “the saver” in Canada. At the time, if you bought a home for $301,000, you would need $75,050 or 25% to get a mortgage. The lifting of the cap at the time allowed people to not only buy with just $15,000 but it also allowed homeowners to buy more house than they needed (you basically be purchasing on cash flow). Not only did this cause people to save less because they didn’t have to come up with a larger cash down payment but it also allowed them to build up more debt making your bank (NOT YOU) a whole lot richer. On this change, I think the government didn’t go far enough. Minister Flaherty could have gone further and taken a big step towards helping many Canadians find the lost art of saving, one that our parents knew so well.
Refinancing to 80%
As far as the last change announced today whereby the government has limited refinancing to only 80% of the value of your home from 85%, this actually is a move that preserves wealth for a homeowner. The government shouldn’t be in the refinancing business. The primary role of the Government of Canada (via CHMC) should be to put Canadians into homes and not enable homeowners to use their homes as ATM machines, which is exactly what the bank’s want you to do, because building up bad debt on lines of credit and credit cards makes your bank a lot of money!
These changes will have a positive impact on consumers and the market overall. They will create a more confident buyer – a buyer that is well prepared, motivated and able to afford their new home and return the home to a primary investment that can help Canadians create wealth vs. using it as a credit card that only contributes to your bank’s bottom line. (Source: Monster Mortgage)
If you have any questions or concerns about these changes please don’t hesitate to contact me.