Jim Flaherty By BuzzBuzzHome’s Resident Economics Guru

Amid speculation that the housing market is still overheated, Jim Flaherty and Mark Carney have repeatedly warned the public against carrying too much personal debt. But, it seems people haven’t listened. In 2012, debt-to-disposable income has risen to 152 per cent from 150.6 per cent at the end of 2011.

Interest rates are Mark Carney’s domain and, despite grumblings earlier this year that rates would rise toward the end of 2012, he has no intention of raising them anytime soon. The international economy just isn’t on sound footing yet. Remember, interest rates are still at historic lows.

Once rates return to normal levels, it could spell disaster for over-leveraged Canadians. If Mark Carney could target mortgage rates alone without raising interest rates across the board, he would. But, that’s just not how this stuff works.

With Carney’s hands tied, it’s up to Flaherty to take the reins.

And today, Flaherty took aim. He announced four changes to tighten mortgage lending rules:

  1. Lower the amortization period from 30 years to 25 years.
  2. Homeowners will only be able to refinance 80 per cent of the value of their homes versus 85 per cent previously.
  3. The CMHC will no longer insure homes valued at over $1 million.
  4. The maximum gross debt service ratio will be fixed at 39 per cent.

Assuming a purchase price of $400,000, a downpayment of 15 per cent and a fixed rate of 3.29 per cent, currently offered by BMO Bank of Montreal, the change in amortization period would increase monthly payments to $1,689 from $1,512**. That’s about 12 per cent — no small chunk of change.

Flaherty didn’t increase the minimum downpayment requirement which would have been a more substantial blow. This signals that he’s not too worried. He’s just trying to offset incredibly low interest rates and, in short, make sure Canadians aren’t binging on cheap debt.

**By the way, we used RateHub’s awesome Mortgage Calculator to get the numbers. You should play around with it. It rocks!

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