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Mortgage regulation changes on the horizon

On the heels of recent reports that Canadian consumer debt is at an all-time high – surpassing US levels for the first time ever, and exceeding $1 trillion overall – financial regulators are warning tighter mortgage regulations are not far off.

Despite being more leveraged, Canadians did not experience the same scale of recession and housing collapse experienced in the US thanks, in part, to our stricter mortgage regulations. To start, mortgage interest is not tax deductible in Canada, which incentivized US consumers to take on more debt than could be comfortably maintained. This on top of the lax lending practices exercised by US financial institutions, otherwise referred to as NINJA lending, or No Income No Job No Assets. Lenders offered `teaser` rates to sub-prime borrowers with little-to-no documentation required to establish an ability to pay. Many sub-prime borrowers defaulted on their loans, which sat on the books of both US and international institutions, and the rest is history.

For a more detailed explanation of the credit crisis, see Jonathan Jarvis`s video, The Crisis of Credit.

Meanwhile in Canada, we have strict documentation requirements, a minimum down payment requirement of 5% and, at present, a maximum 35-year amortization pay off period. We also now have the benchmark qualifying rate set by the Canadian government, which requires borrowers interested in variable or fixed mortgage rateswith terms of less than five years to qualify for a posted fixed 5-year fixed rate. As the posted fixed 5-year rate is higher, the qualifying rate ensures individuals will be able to afford their property if interest rates increase.

However, as consumer debt in Canada continues to rise, regulators have cause for concern. Finance Minister Flaherty has prompted banks to tighten their own lending restrictions, yet the central bank has kept interest rates low, to stimulate a still unrecovered economy. Private institutions have pushed back as they have little incentive to take on the responsibility of more regulation while they are competing with each other and have market share considerations.

So, if the government is concerned with housing debt levels, it will be their responsibility to tighten federal regulations. They can do this by either shortening the maximum amortization period, with the consensus being likely to 30 years, or increase the down payment percentage.

Given that just a couple decades ago the minimum down payment percentage in Canada was much higher, this seems like a market correction to premature leniency.

So, what does this mean for you, the consumer? Well, for one, you better start accelerating your saving plan for that down payment. And with the potential for minimum monthly mortgage payments to rise as the payments are spread over a shorter payoff period, you should at least budget for a 30-year amortization.