Posted by: Vince Gaetano
Monday’s (Jan. 17, 2011) announcement by Finance Minister Jim Flaherty that the government will be tightening mortgage rules has created a great deal of attention in the media about home loans in Canada. Over the past week we have been asked by many clients and the media about our opinion on this matter and what these changes mean for Canadians?
Don’s blog post last week explained these changes and commented on the impact they would have on interest rates in the short term. New and existing homeowners have had the opportunity to absorb the commentary on specifically how the three changes will help Canadian homeowners create more wealth in the long run by building equity in your home.
You are probably asking yourself “How can these changes create wealth?”
First, the government’s reduction of the 35 year amortization to a 30 year maximum can save you thousands of dollars in interest over the length of your mortgage. If you eliminate 5 years of regular mortgage payments you save tens of thousands of dollars – this is money you keep in your pocket! We are pleased to say that over three quarters of our clients opt for amortizations of 25 years or less and they do take advantage of accelerated bi-weekly payments which further reduce their interest costs over the long run. Lower amortizations and accelerated payment options help you pay your mortgage down faster and build wealth in the form of equity in your home.
Second, the government’s reduction of the high ratio 90% refinance option to 85% effective March 18, 2011 will prevent Canadians from tapping into their home equity to pay off higher interest rate consumer credit facilities. This measure will eliminate the easy way out of debt consolidation and save the nest egg. This decision will allow homeowners to preserve wealth in their biggest asset – their home.
As for the third measure of eliminating high ratio insurance on line of credit products, this was not a very well used product and will not have an impact on the majority of consumers. Today, a line of credit to 80% is still available to you without high ratio insurance and the idea of having to pay an insurance premium to access an additional 10% equity was never worth the cost. Quite frankly, the government shouldn’t be in the business of insuring products that are of a revolving nature and this is their way of sticking to what they are good at.
Many in the real estate market have reacted negatively to the government’s changes for selfish reasons but the reality is we need to maintain our homes as the foundation to wealth creation and bring back into fashion the mortgage burning party! There is nothing more satisfying than knowing that you don’t owe anyone a penny any longer – now, who can argue with that?
If you need any help understanding how the new rules affect you, please call us directly. Remember, you can refinance to 90% up until March 18th so if you want to be grandfathered under the old mortgage rules, call today.