Mortgage Rule Changes: March 18th, 2011

As the household debt levels in Canada surpassed that of the United States in the third quarter of 2010, the Canadian government has imposed new regulations on the mortgage industry.  With household debt at a high of 148% of disposable income for Canadians, new mortgage lending regulations are set in place to take effect on March 18^th, 2011.

Many of those in the industry were opposed to the changes, as in 2010 similar regulations had already been put into place.  The changes made it more difficult for individuals to qualify for a home purchase – although the changes were necessary. To avoid raising interest rates, the most recent changes were thought to be a practical decision to help individuals in the market for a mortgage to be able to adequately afford a home.

The changes that will come into effect on March 18^th are the following:

• Amortization rate reduced to 30 years - The maximum amortization period that an individual can obtain a mortgage with is reduced from 35 to 30 years.  Thirty years is an extended amortization from the typical 25 year.  Extended amortizations are popular among those who wish to spread out their payments over a longer period of time, as it decreases the frequency payment. The reduced amortization means that families will pay much less interest , therefore more can be paid towards principal and building equity in the home.

• Refinance up to 85% of their mortgage – This change will see that individuals looking to refinance must keep at least 15% of their equity within the home. As of right now, individuals can refinance up to 90% of their home’s value.

• Removal of insurance on HELOCs – HELOCs, also known as Home Equity Lines of Credit allows an individual to borrow up to 80% of the value of their home.  This has been a big factor in the amount of household debt accumulating over the past several years.  This change will come into effect on April 18^th, 2011.

The changes are thought to be a conservative step in helping reduce household debts in Canada, and potentially avoid a potentially detrimental economic situation as seen previously in the United States.  Some industry professionals find the change unnecessary, as the changes made in 2010 were already very effective and prudent steps towards ensuring homeowner housing affordability.