Today Finance Minister Jim Flaherty announced three major changes to take effect on the Canadian housing market in the coming months. Concerns over rising debt levels, which reached 146% of personal disposable income per average Canadian household in 2009, prompted the government to take action.
The first change will reduce the maximum amortization period to 30 years from 35 years. Shorter amortization periods increase mortgage holders` monthly payments but reduce the total interest paid over the life of a mortgage.
Secondly, new regulations will lower the maximum amount Canadians can borrow when refinancing their mortgages to 85% from 90% of the value of their homes.
And finally, the government will no longer insure lines of credit secured by homes, otherwise known as Home Equity Lines of Credit (HELOCs). The alarming rate at which HELOCs have grown in the past decade, 170% or twice the rate of mortgage debt, has increased HELOC debt to 12% of overall household debt.
Mr. Flaherty said this was of particular concern because `some of those loans are not used to create housing in Canada. They are used to buy boats and cars and big-screen TVs. That`s not the business mortgage insurance was designed for.`
Mr. Flaherty assured Canada was not at the verge of some type of US-style housing collapse nor does it have an alarming mortgage default rate – which is less than 1% – but rather Canadians are borrowing as much as possible. This is of great concern in low interest rate environments, as mortgage rate increases can be crippling. High debt levels are not only risky but represent a significant burden on quality of life. Mr. Flaherty hopes the new regulations will encourage Canadians to save more.
The changes will take effect in stages, with the amortization and refinancing changes implemented on March 18th, and government backing on HELOCs to cease as of April 18th.
The central bank will issue an interest rate announcement tomorrow and it is expected to hold its interest rate. The Monetary policy report, to be released on January 19th, will give us a sense of where future interest rates are headed.