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Finance Minister Jim Flaherty outlined new rules aimed at reining in a hot housing market today and ensuring Canadians aren't taking on more debt than they can afford.

Flaherty outlined a series of changes to the rules that govern the Canada Mortgage and Housing Corporation, the crown corporation that effectively oversees the housing market by insuring the vast majority of Canadian mortgages.

The most important new change is that the maximum amortization period to 25 years, down from 30. The longer a mortgage is spread out, the lower the monthly mortgage payments are — but the more the borrower ends up paying overall over time.

The impact of the change is likely to be significant. It's about the same as a 0.9 percentage point increase on a typical mortgage, Bank of Montreal economist Robert Kavcic noted.

It's also likely to affect a huge segment of the market, as about 40 per cent of all new mortgages were amortized over 30 years last year, the Canadian Association of Accredited Mortgage Professionals estimates.

Anyone who needed or wanted a 30-year mortgage before is going to have to qualify under tougher 25-year requirements now.

Ottawa has now moved three times to rein in the maximum mortgage term, since the CMHC briefly started insuring mortgages with 40-year terms in 2006. The limit was brought down to 35 years, then 30 and now the more traditional 25.

"The reductions to the maximum amortization period since 2008 would save a typical Canadian family with a $350,000 mortgage about $150,000 in borrowing costs over the life of that mortgage," Flaherty said.

"Our government has encouraged Canadians to borrow responsibly," Flaherty said. "Most Canadians have done so."

At 25 years, the maximum amortization period for CMHC-backed loans is now back to where it had historically been before the Harper government began raising the period after taking office in 2006.

 

What is an 'insured' mortgage?

In order to guard against risk in the financial system, Canadian law requires certain borrowers to purchase insurance against their loan, in case they end up defaulting on it.

Under the current rules, any would-be home buyer must purchase insurance (this most often comes from CMHC, but sometimes from other private-sector insurers) if their down payment is less than 20 per cent of the value of the home.

Any borrower who meets that threshold can get a mortgage from a bank without having to obtain insurance, and those are known as "uninsured" mortgages. So a borrower who gets a $300,000 mortgage and puts down only $30,000 or 10 per cent on the home would be insured, but a borrower who has $100,000 down for the same home would be uninsured.

 

For the full story provided by CBC News, click http://www.cbc.ca/news/business/story/2012/06/21/flaherty-mortgage-cmhc.html 

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