TORONTO - If you haven’t tapped out your home equity line of credit yet, you’d better move soon or you might not be able to.
Federal finance minister Jim Flaherty is changing the rules governing mortgages and lines of credit tied to your house in an attempt to wean consumers off their growing debt habit.
As of July 9, your mortgage and line of credit debt will be limited to 80 per cent of the value of your home. It’s currently 85 per cent.
Doesn’t sound like much, you say. Maybe not. But if your home is valued at $500,000, the current rules allow you to be in hock for up to $425,000. Under the new rules, you’ll be limited to $400,000.
That’s a $25,000 difference – enough to keep you from fixing up a couple of bathrooms or doing a partial reno on that tired kitchen.
Maybe you’ll just have to save up to do that work.
SOUND OFF: Did Flaherty go too far in tightening the rules? With the market showing signs of cooling, is this going to speed up a drop in real estate prices? Join the conversation on Facebook.
The hit on first-time buyers is a little more significant. If you have less than 20 per cent as a down payment, that Canada Mortgage and Housing Corporation-insured mortgage that you apply for will be limited to a 25-year amortization, instead of 30.
Again, no big deal you say. If you paid $375,000 for your house and put down $25,000, your payments would be $1,662.34 a month, if the interest rate on your mortgage was 3.99 per cent and the loan was amortized over 30 years.
Take that down to 25 years and your payments increase by almost $200 to $1,839.17 a month.
Yes, you’ll save money over the life of your mortgage by paying thousands less in interest costs – but you have to qualify for that mortgage first. If you could barely qualify with the lower payments that a 30-year amortization came with, you could be shut out with amortizations limited to 25 years.
Not doing it to save money
“[Flaherty’s] not doing this for the reason he said,” Ian Lee, director of the Sprott School of Business at Carleton University in Ottawa, said. “They’re not doing it to save consumers money. They’re doing it to try to cool down the housing market.”
Lee says the changes are long overdue. He notes that it wasn’t that long ago that you had to get CMHC insurance if your down payment was under 25 per cent of the purchase price of the house. Now, it’s 20 per cent.
What Ottawa’s doing, Lee says, is trying to take some risk out of the industry.
“It’s very important that mortgage lending rules be prudent as opposed to imprudent as they were in the United States before that market crashed. Spain’s rules, on the other hand, made the U.S. look prudent.”
Other changes that Flaherty announced include:
- No CMHC insurance for houses worth more than $1 million.
- Your house payments, heating costs and maintenance fees cannot exceed 39 per cent of your income.
- Your total debts (house, car, credit cards and other loans) can’t exceed 44 per cent of your income.
“They’re trying to prevent what kind of happened in the U.S. a few years ago,” Sadiq Adatia, chief investment officer for Sunlife Global Investments, said. “In order to do that they have to … either raise rates or make it harder to buy a home. Given the economy is so bad, they can’t raise rates right now … so they’re curbing the rules.”
But figures released by the Canadian Real Estate Association (CREA) show that – in most markets – real estate activity has started to ease up with prices starting to pull back a bit.
CREA's president Wayne Moen was less than enthusiastic about the changes announced by Ottawa.
"We believe today's announcement is a measured response to the government's often stated concern about household debt levels and the housing market," Moen said. "That being said, we would remind the government that the re-sale housing market makes a significant contribution to the economy, adding an estimated $20 billion in spin-off spending and over 165,000 jobs in 2012."
"Going forward, we would urge the government to consider the impact of further interventions in the market carefully."
Lee says with debt levels reaching new heights, the government had to do something to prevent a hard landing in the real estate market.
“It’s a delicate balancing act,” he said. “By doing too much on real estate, you could cause a crash in the market. A collapse in the real estate market could spill over to the broader economy and cause a deep recession.”
He adds there are other ways to keep the lid on the housing market, if the government feels these moves didn't get the job done: requiring higher down payments and ending CMHC insurance of home equity lines of credit.
By forcing home buyers to come up with larger down payments – say, 10 per cent – Lee says you would take a lot of first-time buyers out of the market. That would put a real damper on the market.
"Increasing the minimum down payment has a huge, huge impact," Lee said. "You can fudge your income numbers. But with the down payment, either you have the 10 per cent or you don't."
It’s something the government could do, he says, gradually so the impact is spread over several years.
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