It was three months ago that Canadian banks started to talk about tightening lending standards in order to ensure that borrowers were able to carry their mortgages. Now Finance Minister Jim Flaherty is enacting this on his own for pretty much the same reason - to make sure that Canadians aren’t taking on more debt than they can afford and more importantly, to make sure that low interest rates do not fuel asset bubbles. Are you concerned or unsure how the changes will affect you?
To simplify it, there are two main changes to the changes in the guidelines used to provide credit-default insurance high-ratio mortgages. The first and most publicized one is that the maximum amortization period or, in other words, the amount of time to pay back the mortgage, that has been reduced from 30 years to 25 years. The shorter period will be reflected in the higher monthly mortgage payments, and less interest will be paid in the long run. In fact, impact of reducing the amortization period is about the same as paying a 0.95 percentage point less on a typical mortgage.
Another important change is reduction of the maximum amount any homeowner can borrow against the value of their homes from 85% to 80%. This step is believed to "promote saving through home ownership and encourage homeowners to prudently manage borrowing against their homes."
There were some more new measures announced such as the maximum gross debt service ratio being fixed at 39 per cent and the maximum total debt service ratio at 44 per cent and limiting the availability of insured mortgages to homes with a purchase price of less than $1-million so as taxpayer-backed mortgages were not a privilege of wealthy Canadians.
Well, even though this may cause headaches to many Canadians, it is important to mention that the previous rounds of changes were initially unpopular with people but all have thus far proven to be beneficial economically with the passage of time. As David Larock, a Canadian mortgage planner says, "If this short-term pain helps to preserve our long-term gains, then I’m all for it."
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