Canada’s new mortgage rules

No doubt you’ve heard some news about Mr. Flaherty’s announcement yesterday regarding Canada’s new mortgage rules. If you haven’t, you can check it out in today’s Globe and Mail.

I’ve noticed, by a casual and highly unscientific poll of my friends Facebook updates, not everybody is excited by the change. Since I seem to be the only one that applauded quietly in my office when I read the news yesterday morning, I’ll stay quiet about it on Facebook.

Some experts say this will slow the housing market and cause existing sale prices to go down. Some say this will slow the economy, folks will buy less stuff.

I’m not an economist nor an expert at very much, but I’d be happy to list the reasons why I think this is a good move by Flaherty.

I’ve watched two of my friends lose their homes because they borrowed too heavily against it, and then owed more on it than the house was worth to sell. The new rules indicate that folks can borrow loans up to 85% against the value of their home, instead of the previous 90%. In the two cases I know about, my friends had simply spent more than they earned on a consistent basis. They’d bought new homes in a new subdivision and suddenly needed new furniture, new trees to plant outside, new vehicles, new, new, new. Jobs were rare, particularly those that paid reasonably well. In both cases, the women, who previously worked, couldn’t find jobs and wouldn’t work for minimum wage. Eventually, they both made consolidation loans against their home, up to 90% of the value. Seemed like an okay move when real estate was in a heyday, but they heydays didn’t last. One family lost their house (and marriage), the other is in the middle of bankruptcy filings.

In my network of friends, I know two people who did this, and they both lost. That’s a 100% failure rate. How much safer will 85% be? I’m not convinced it’s much better, but it is a start.

If it’s safe to have a 20% downpayment and not trigger Canadian Mortgage and Housing Corporation (CMHC) insurance, isn’t 20% equity the magic number? Perhaps we’ll get there eventually.  Flaherty knows he can’t push too hard.

One of the biggest changes Flaherty made is changing the maximum amortization from 35 years to 30. Ok, I understand a longer amortization means you pay less week to week or month to month. For some, it may mean the difference of owning a home or not owning a home. Flaherty is saying if that’s the benchmark, then you can’t afford to own a home, at least, not yet. Rules aside, folks will find all sorts of creative ways to get around this kind of thing. Perhaps they’ll borrow money from a line of credit in order to make the payments, maybe they’ll borrow from friends or family, or sell investments. I’m not suggesting any of this is wise, I just know folks will find a way if they want something bad enough. I have about 37% equity in my home, and quite frankly, I tremble at times when I look at the remaining obligation I have. Some folks want to be in a home so bad, and they have no idea what the costs are to just maintain it, and to keep paying the mortgage month after month, and year after year. I’m looking forward to saying goodbye to this mortgage before I retire. Imagine paying a mortgage in your retirement?

When the mortgage on my rental property was up for renewal last year, the bank said “20 year amortization?” and I said “nope, it was 20, now it has to be 15, right?” Yes, it costs more, but I have a plan for this property to be paid for by the time I retire. I can’t execute that plan if I’m still paying a 20 year mortgage 15 years down the line.

All of these changes are about reducing our exposure to risk. More debt means we’re destined for more trouble when those interest rates rise. I can imagine the conversation over a pint at a pub on the Hill between Carney and Flaherty:

“Jim, I can’t keep these rates this low forever you know. Canadians are holding record debt. The kids aren’t all right.”

“I know Mark, I worry too. What if we take a small step to help protect a few thousand Canadians. What do you think of shorter am’s and decreased borrowing against value?”

“It could work Jim. It’s a start. Some people would be ticked at you.”

“I know, but we have an obligation, don’t ya think?”

“Yeah Jim, we do.  Bartender, another round please…we have a plan to draft up.”

Do Flaherty’s changes impact your world?

 

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15 responses to this post.

  1. I too think they will be a good thing. We amortized at 30 years when we got our mortgage, but we are paying it on an accelerated bi-weekly basis so we have 26 years to pay on it (according to our mortgage account). In 2 1/2 years when it’s time to renew, we will be consumer debt free and I want to amortize at 20 years, then 15 and so on. I know the payments will go up considerably, but that will put us on track to pay it off well before I retire in 2035.

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  2. I think the changes are good, though I do think more changes are needed and will hopefully follow in the next few years.
    Over here, I’m like you – have 38% equity in our home. We started 4 years ago with a 20 yr mortgage and based on our current payment schedule (paying extra each month) we are down to a 12.5 yr mortgage. In a few years we’ll increase our monthly payments again and hopefully get it paid off fully in about 11 years from now… making our total mortgage payment timeline 15 years.

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  3. It hasn’t affected me and won’t, but I have a friend who is upside down on their mortgage due to refinancing at the peak of the market. Now they want to sell – I couldn’t handle that kind of money stress. I need a LOT of cushion to feel safe.

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    • I’m with you, Jacq. I like to sleep at night. Ok, the kittens keep me up, but that’s the kind of disruption that’s easier to manage than feeling strung out over money all the time. Do you find as a single parent you feel even more of a need for that security than some of your “with partner” friends?

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      • I hadn’t thought of the security thing from that perspective because I’ve ALWAYS been single – or not been a double income household, but that’s probably part of it. Plus when you have kids (and fur-kids) even MORE “stuff” just happens that you have no control over and can’t really budget for I guess. I think most of it is due to being so very poor for so very long though and doing the freak out whenever something bad happened as a result of that. 🙂

  4. The changes are a step in the right direction. Here’s how naive I am – I had no idea you could get a mortgage for 30 or 35 years – I thought 25 was the max. I think it was when I got my mortgage 16 years ago. Just thinking about all of that extra interest just gives me the willies! If Flaherty had been any less conservative everyone would have balked big-time, I think he’s smart talking small steps.

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    • Jane, funny you mention that. Only a couple of years ago was I aware that folks could take out 40 year mortgages. Sheesh. I totally understand the desire to be a home owner, if that’s your thing, but the cost of that is just so outrageous. If folks could limit themselves to 25 years, they’d be better off, I’m sure. The trouble is, the price of homes in some areas (Toronto, Vancouver) is really outrageous. Although I risk sounding like somebody’s grandmother, I honestly don’t know how some young people are going to get into the housing market. I’d certainly say skip the $50K wedding and save the money toward a home. Have a modest party, and make it fun, everybody will still remember it.

      We’ll see how this pans out!

      Reply

  5. I read about it, and also quietly applauded. It was reminding me that we can’t afford to buy a home, yet. I will want to have a substantial downpayment when we are ready to buy, but that of course comes after the debt is all repaid. By that time, these new rules will be the norm, and maybe with further rules coming in to further reduce amortization periods and requiring larger downpayments.

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  6. Posted by Christy on January 18, 2011 at 8:52 pm

    I am curious about your equity % (you and Makky’s Mom). Are you basing it on the percentage of your purchase amount that you have paid off, or on what you think the property is now worth?

    As for Flaherty’s changes – yes I think it’s a good idea. A step in the right direction.

    Reply

    • Hi Christy, I can’t speak for Tay (Makky’s Mom), but I’m basing my equity on the most recent appraised value of my home, which is likely under-valued as it’s from August 2009, and property values in Toronto have increased about 5%. Then I have deducted the amount owed (mortgage). The remaining amount is equity.

      Glad you’re on board with Flaherty’s changes. (Like we have a choice, right?) 🙂

      Reply

      • Posted by Christy on January 18, 2011 at 9:30 pm

        Ok – that makes me feel a little more confident as the current market value of my home gives us an equity rate of approx. 40% – a respectable figure after 6 years.

    • Same here. I based it on the current value of our home, based on the prices other similar houses have fetched on our street in the last year. So, our house is valued at about $360,000, and our mortgage is $220,000 so the difference is our equity, which is about 38% (if my math is correct).

      Reply

  7. Posted by Eleanor on January 19, 2011 at 1:48 pm

    I agree w/ the remortgage/loan ammount, but still see the value of amortizing over 35 years. As a 50-something (always) single gal, I’d *never* have been able to jump on the low interest rates and buy last year, otherwise. Just another viewpoint.

    Reply

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