The federal government this morning announced new rules when it comes to taking out a mortgage or using your home as collateral to borrow more money.
The Department of Finance calls this “Supporting the long-term stability of Canada's housing market”.
There are three basic changes that will come into effect on March 18:
- The maximum length of a government-insured mortgage will be 30 years, down from 35 years.
- The government will no longer insure home equity lines of credits or HELOCs
- If you want to borrow against your home, the maximum amount you can get will be 85 per cent of your home's assessed value, down from 90 per cent.
Here's the bottom line on these changes from BMO Senior economist Michael Gregory:
Before this weekend, the speculation had been that tighter mortgage insurance rules would be included in the upcoming federal budget. However, there is a risk that the budget could become a catalyst for a federal election (meaning the budget wouldn’t pass), and these measure were obviously deemed too important not to be passed and put in place for when Canada’s housing market wakens from its winter slumber in a couple months. For the new homebuyer, the reduced amortization is a significant change that should soften the demand for homes/mortgages below what they otherwise would have been. It also provides a bit more cover for the Bank of Canada; they don’t have to resort to policy rate hikes as readily to address high and rising household debt burdens, which would have dampening impacts well beyond just the housing sector (the BoC’s next policy decision comes tomorrow, but no policy rate hikes were expected).
Gregory also does some quick calculations to show how these changes will result in higher monthly mortgage payments but big-time savings over the life of a mortgage:
| Assuming a $300,000 mortgage |
| Monthly payment | Interest rate | Total payments |
| Interest | 30-year | 35-year | equivalent | saved over life | |
| rate | amortization | amortization | Difference | (35-year amort.) | of mortgage |
| 3% | $1,265 | $1,155 | $110 | 64 bps | $29,579 |
| 4% | $1,432 | $1,328 | $104 | 56 bps | $42,288 |
| 5% | $1,610 | $1,514 | $96 | 49 bps | $56,139 |
| 6% | $1,799 | $1,711 | $88 | 43 bps | $70,924 |