Finance Minister Tightens Up Mortgage Debt Rules

Trying To Keep Household Debt Manageable 

Finance Minister Jim Flaherty announced this morning that rules for borrowing against your home are being tightened up to help Canadians control their level of indebtedness. The rules which apply to mortgages and lines of credit secured by homes hopefully will address the household debt problem in Canada.

Canadian household debt is now at $1.4 trillion which represents a debt to income ratio of 147% which the IMF (International Monetary Fund) warns is the number one risk to the Canadian economy.

The rule changes which will directly affect mortgages and home backed debt are:

• Amortization on a home is reduced from 35 years to 30 years.
• The maximum amount which can be refinanced by way of a mortgage is reduced to 85% from the current level of 90%.
• The Canadian government (that is the Canadian taxpayer) will withdraw the insurance backing on lines of credit secured by homes.

The Finance Minister's concern is that Canadians who have borrowed heavily during recent years while interest rates have been kept down to help cope with the economic down turn, will be unable to pay their mortgages when and if rates do increase.

Comment: smarter minds than mine could disagree but as I have said before I think our whole economic prosperity is much to do with smoke and mirrors. Our houses have inflated value simply because the qualifications for mortgages have been kept artificially low for years now. This means more people can be leveraged into home ownership, which actually has the effect of driving up prices. You could argue that increase is a result of manipulation by banks and governments. You could further argue that this manipulation is what lead to the housing bubble crisis which is still rocking the financial worlds.

Think about it! Canadians have household debt totaling $1.4 TRILLION with a debt / income ratio of 147%, add to that our Sovereign debt of over $500 BILLION and in BC a provincial debt of $50 BILLION and you really have to ask yourself "what in hell have we been doing these past few decades?".

To paraphrase a quote from the 'Good Book' (which it seems is no longer in favor in Canada) "borrow money and you are the lender's slave.".

These changes will have the effect of cooling house sales as fewer people qualify for mortgages which ultimately will have the result of lower real estate prices. Which of course is good news if you are looking to buy a home for the first time. So, if that is you, just continue renting until the prices come down to the point where you DO qualify under the new rules. In the end you will be getting your house for less.