On January 17, the federal government announced another round of tightening in mortgage rules. Ottawa will reduce the maximum amortization period to 30 years from 35 years for government backed insured mortgages with a loan-to-value ratio of 80 per cent or more. In addition, the federal rules will lower the maximum amount we can borrow in refinancing our mortgage from 90 per cent to 85 per cent and thirdly, the government will no longer insure lines of credit secured by homes.
This move is aimed towards the reduction of Canadian household debt, which surpasses even the household debt of U.S. home owners, with a ratio of owed money compared to disposable income at a level of 150 per cent. These arrangements allow the Bank of Canada to fight household debt, but are also likely to hit people with high-interest debt (especially those who are paying it up with home equity lines of credit). In British Columbia, where 40-year mortgage amortization was very popular because of the province’s highest real estate prices, many people who planned on buying won’t be able to bid the same price on a house.
Since 1992, when amortization periods had been set to a maximum of 25 years, the government has increased the maximum period to 30 years in 2005, 35 years in 2006 and 40 years in 2007. The 40 year term was cut back to 35 years last year, followed by the recent tightening that will take effect on March 18, 2011. Finance Minister Flaherty hopes that it will deliver “some moderating” effect on the housing market.