Government-insured mortgages capped at 25 years from 30.
Huge housing news out of Ottawa Thursday left Canadians wondering what this all means.
Here’s the short of it: Starting July 9, the maximum numbers of years government-insured mortgage is now capped at 25 years from 30 years. Also, refinancing on your home is cut from 85 per cent to 80 percent, government-back housing insurance is capped at $1 million and the government “will restrict all would-be borrowers from mortgage insurance if their maximum gross debt service ratio exceeds 39 per cent and their maximum total debt service ratio rests above 44 per cent,” Vernon Clement Jones writes in Mortgagebrokernews.ca.
This makes it the fourth time the Canadian Government has shortened the length of leases on homes in four years, dropping from 40 years to 35 in 2008 then to 30 years in 2011. The point of lowering the leasing period is to “discourage home owners from taking on too much debt,” worded in a Reuters report.
Instead of taking on too much debt, home owners may not be able to afford homes with higher monthly payments. At the same time, though, the higher monthly payment saves home-owners on interest.
Here’s the example CBC’s Pete Evan wrote in his report, Thursday:
“A $300,000 mortgage spread over 30 years at 4.0 per cent would cost $1,426 a month to pay back. That same mortgage amortized over only 25 years increases the monthly payment by $152 or 10 per cent to $1,578 a month.
Ultimately though, the higher monthly payment saves the borrower money in the long run. The total interest payments are $213,558.91 on the 30-year mortgage, but only $173,416.20 on the 25-year one.”
So it’s a catch 22. At 30 years and a lower monthly payment, home owners could save more and afford the interest rate, but at 25 years, homeowners will have a higher monthly payment to ensure their houses will be paid off.
The whole point of lowering the maximum length of the lease is so the bubble on the hot Canadian housing market doesn’t burst like it did in the United States in 2009.
In an editorial in the Edmonton Journal Thursday, “the average household in Canada owed $1.52 for every $1 earned,” – a level similar to when the US housing market burst – which is why the refinancing limit changed from 85 per cent to 80 per cent, starting July 9.
“This will promote saving through home ownership and encourage homeowners to prudently manage borrowings against their homes,” Finance Minister Jim Flaherty said.
Basically the government is trying to ease a growing housing market before it thinks it will grow out of control. Canada’s housing market wasn’t affected like US was and it’s trying to avoid the same collapse, which put the Americans in a recession.
Opinions on this are obviously mixed. Some think the market doesn’t need cooling off, especially in markets like Vancouver where prices are flat.
Cameron Muir, chief economist at the B.C. Real Estate Association, said new federally sponsored rules to reduce home buyers’ debt will only hurt the local market.
“There is no need to cool down a housing market that is already cool,” Muir said.
As for brokers, they’re about to go into a really busy time over these next two weeks with buyers wanting to get in on the 30-year loans with 5 per cent down payment.
The government is trying to be safe than sorry, but is there a need to be safe right now?
What do you think?
Information was used from http://www.cbc.ca/news/canada/ottawa/story/2012/06/21/flaherty-mortgage-cmhc.html; http://in.reuters.com/article/2012/06/21/canada-housing-flaherty-idINL1E8HL2N020120621; http://www.edmontonjournal.com/business/Editorial+Mortgaging+future+responsibly/6823515/story.html and http://www.mortgagebrokernews.ca/news/breaking-news/rule-changes-spur-brokers-and-clients-into-action/123884/ in this blog posting.