Despite the recent economic conditions south of the border and the looming threat of the collapse of the Euro, the Canadian housing market has seemed bulletproof. According to a recent Globe and Mail article, house prices have doubled since 2002, experiencing an annual growth rate of 5 per cent above consumer inflation. Toronto, Calgary, and Vancouver have seen even greater growth. This has led many experts to believe that the Canadian housing market is due for a correction.
What's especially concerning is that Canadians have been taking on records amount of debt, on average 152 per cent more than income. As a result, on June 21, 2012 the government announced their plans to implement policy changes to curb the level of consumer borrowing, the fourth time in the last four years.
The new mortgage rules which kicked in on July 9th only apply to federally regulated lenders. Therefore, provincially regulated financial institutions such as credit unions are unaffected. Furthermore, these changes only pertain to high ratio borrowers with government insured mortgages (those with a Loan-to-Property Value of less than 20 per cent). The rules are summarized below with explanations of what it means for Canadian homeowners:
Maximum Amortization decreased from 30 years to 25 years
- So what? For some, housing has become less affordable because a reduced amortization means higher mortgage payments. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), 40 per cent of new mortgages last year had amortizations over 25 years. This change could therefore affect a significant number of home buyers. On the positive side, reduced amortization will mean that home buyers will be able to build equity more quickly and reduce the total interest paid over the life of their mortgage.