Mortgage rules to be tightened in Canada

Home loan gets Dearer

Government is concerned over high household debt in the country. As a result, an announcement has been made declaring the changes in Mortgage rules.

The amortization period has been lowered from 30 to 25 years; also the buyer can borrow a loan of 80 per cent instead of the previous percentage of 85.

Someone who buys a home by paying a down payment of less than 20 per cent of its value will; be required to purchase mortgage insurance through Canada Mortgage and Housing Corporation which is backed by the Government.

”The new rule says any mortgage amortized over 25 years will not enjoy the benefits of insurance which indirectly ensures that no mortgage can exceed the period of 25 years in Canada.”

The impact of decreased number of mortgage years would be directly upon the payments made by the buyer. The benefit is that the buyer can own the home in a shorter period of time and build up his equity faster than before.

Government has been reducing the number of mortgage years for the last 4 years. The first cut was made in 2008 when the amortization period was reduced from 40 to 35 years and a minimum down payment of 5% was mandatory.

Second set of changes were brought in 2010. In 2011, the amortization period was reduced from 35 to 30 years and the borrowing percentage was reduced from 90% to 85%.

Before bringing in these changes there were many warnings over increasing debts from the Government officials. Finance Minister Jim Flaherty and Mark Carney Governor of Bank of Canada have been warning people over this issue.

Housing prices have kept rising in the recent past and the interest rates have been quite low on mortgages have jointly led to these changes.

Bank of Canada has reported that a very high household debt is the biggest risk to the economy of the nation. A record high of 152% debt to income ratios has been reported by the Bank.  

Experts opine that this is the right time to invest in buying a new home. It is speculated that the interest rates will keep growing from here. It is suggested if one gets an adjustable mortgage rate at 2% and in two years’ time it goes up to 5% or more then it will cause a great increase in in the monthly mortgage repayments.

Real Estate experts believe that affixed rate mortgage and a larger down payment will save one from the fluctuations of the market.