The Debt Diet: Flaherty introduces new mortgage rules
Jan 17, 2011
January 17, 2011
In his infinite wisdom our Finance Minister, Jim Flaherty, has introduced three new measures aimed at curbing the rising debt-to-disposable income ratio.
Good things come in three’s, right? Or is it bad things…I don’t know. Either way, there are three changes that were made.
1. The maximum amortization period for mortgages with a loan-to-value ratio greater than 80% has been decreased to 30 years from 35 years.
2. Refinancing was made slightly more difficult– Canadians can now borrow only 85% of the value of their home rather than 90%.
3. Finally, Ottawa will no longer provide government insurance backing on lines of credit secured by homes.
The aim of these policy changes is to encourage Canadians to build up equity in their homes as quickly as possible. A shorter amortization period means higher monthly payments and less interest paid over the life of the mortgage.
Mr. Flaherty said his concern is not Canada’s mortgage default rate- which is less than 1 per cent. Rather his concern is those who are borrowing as much as possible. “We’re seeing people borrow to the max, and borrowing to the max at low interest rates,” [Flaherty] said. “Most Canadians are not doing that.”
These sound like pretty sound policies to me. First of all, it’s good to see a government being proactive. Policy-makers often wait until a catastrophe to get anything done. Flaherty could wait until default rates increased to frightening levels, but instead he instituted the changes when a leading indicator of default rates, the debt-to-disposable income ratio, rose quite high.
So good for him. I guess Flaherty’s New Years resolution was to put Canada on a debt diet. Probably for the best. Thanks, Feds.