Financial Advisors unconvinced new mortgage rules are better

Finance Minister Jim Flaherty recently introduced changes to the mortgage rules, ostensibly as a means of reining in runaway consumer debt. But just how effective do financial advisors feel the changes will be at achieving this goal? And how will the new rules affect those who often need large-size mortgages the most: first-time buyers, especially those with young families?


Most of the changes focus on government-insured mortgages, those backed by the Canada Mortgage and Housing Corp. - a legal requirement when the purchaser has a down payment of less than 20% of the purchase price. The new rules reduce the maximum amortization period on these mortgages to 25 years from 30 years. Also, homes worth more than $1-million are no longer eligible for CMHC-backed mortgages. And for those who are refinancing, the maximum you can borrow against your home's equity is 80% of the market value, down from 85%.


On the other hand, Mr. Flaherty softened the blow by raising the gross debt servicing ratio. That means the total running costs of carrying a home, including heating, taxes and mortgage, can amount to a maximum of 39% of gross income, up from 32%.


On the positive side, the new rules eliminate some of the most highly leveraged mortgages, and may have a cooling effect on overheated markets of Toronto and Vancouver. Reducing the amortization period means that homeowners will be making a higher monthly payment, but will save thousands of dollars in the long run, build equity faster and, in theory, own their homes earlier. The same applies to refinancing; reducing the maximum amount you can take out by five percentage points is not a large amount, but it does reduce the monthly finance obligation, one way to trim runaway debt payments.


And there's a nanny-state gratification in the CMHC's refusal to participate in lowequity, high-mortgage financing for luxury homes. If you have to borrow that much, perhaps you're better off with a modest home; you can always trade up later, when you've built up some equity.


But to the surprise of more than one financial professional I spoke with, the final change Mr. Flaherty has introduced seems to contradict the intent of the others. Raising the amount of carrying costs from 32% to 39% could be enough, in some cases, to cancel out the benefits accrued by the other changes, since it means you can now carry a larger monthly payment. (This, presumably, will affect a much larger proportion of homebuyers than just those who require CMHC backing.) And the new rules have a disproportionately damping effect on young and firsttime homebuyers, who may need the difference between a 30-and 25-year mortgage payment for daycare or other short-term expenses.


Kathryn Kotris, principal broker of Mortgage Architects in Toronto, feels if the government sincerely wants to help Canadians get a handle on their household debt, this is not a strong place to start. "The mortgages affected by the new rules are not a significant proportion of the market in any case, and all mortgages are scrutinized by banks and other lenders at the time they're taken out - our qualifying process is already strict," she says. "Moreover, the higher carrying ratio means borrowers can take on a larger monthly payment than before, which in some cases cancels out the tighter lending restrictions."


Ms. Kotris points out it's laudable to curtail mortgages that place already higher-risk homeowners in danger of becoming overextended, es-pecially if the market cools. However, the new rules also make it tougher for homebuyers who would otherwise be excellent candidates, like young families.


"On a $500,000 mortgage, which is not unreasonable for a typical middle-class home in downtown Toronto, the difference between a 30-year amortization and a 25-year amortization amounts to about $263 a month. For many families, daycare is a significant expense that goes away after, say, five years, when many of them would be renewing anyway and in a position to make higher payments. The new rules basically eliminate these buyers, or make it a lot more difficult for them - unnecessarily, I believe," she explains.


Ms. Kotris would like to see more attention paid to unsecured debt, such as credit cards and unsecured lines of credit, which has boomed in recent years and may be the real financial elephant in the room. As she observes, most Canadians will tighten their belts, if necessary, to make sure they make their monthly mortgage payment on time; but very few of us are quite as disciplined about paying our credit cards in full each month, and some cards carry very high interest rates.


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Today’s Bank of Canada rate hold announcement marks almost four straight years that the key benchmark rate has remained unchanged, since September 8, 2010. Great news if you have a variable-rate mortgage or home equity line of credit; the prime rate stays at 3%.


The announcement noted that “the risks to the outlook for inflation remain roughly balanced, while the risks associated with household imbalances have not diminished.” With these considerations, the Bank is maintaining its monetary policy stimulus, and remains neutral with respect to the timing and direction of the next change.


The next rate-setting day is October 22nd.

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