Posted by: Don Bayer, CFP
The Canadian government announced changes today to the rules for government backed insured mortgages or “CMHC” insured mortgages. The three changes are designed to slow the pace in which Canadians are borrowing money, specifically, refinancing their homes. These changes are in addition to the changes adopted earlier this year which introduced a prescribed “qualifying rate” that was 3% higher than the market rate. For example, while your mortgage payments reflect an interest rate of 3%, the bank would qualify you based on a 6% interest rate to ensure that you could afford your new mortgage whether you were buying a home, renewing your mortgage or refinancing your property. Apparently, nothing the government can put in front of Canadians will slow down this housing market.
The new changes include:
Reduce the maximum amortization from 35 years to 30 years for CMHC insured mortgages. This reduces the amount of money some Canadian’s can borrow.
Reduce the maximum refinance from 90% to 85%, effectively forcing Canadian’s to save and keep equity in their home and lastly
Withdraw government insurance for home equity lines of credit (HELOC’S).
Clearly the government is targeting one specific segment of the economy and is petrified of a US style housing meltdown. Household debt is on everyone’s radar screen. Canada’s Finance Minister, the Hon. Jim Flaherty was clear in his viewpoint that Canadians are traditionally good savers, but removing some of these pro-lending policies will help Canadians in the long run.
The bottom line is that the most effective way for any government to curb spending is to raise interest rates. With many sectors of the Canadian economy still reeling from the affects of the global slow-down, the government in Canada cannot raise interest rates much in 2011. With interest rates this attractive, 2011 may be the last opportunity for Canadians to take advantage and buy a new home.