Tougher Mortgage Rules May Benefit Canadians in the Long Run

August 9th, Toronto, Ontario, Canada

It’s been 2 months since Canadians were introduced to new mortgage rules that will surely press many Canadians to manage their debt better.  Some of the biggest changes we’ve seen are the lowering of government insured mortgages from 30 years amortization down to 25 years, putting a new limit on the loan to value ratio, which now limits refinancing down to 80% from the previous 85% as well as making similar limits to the debt service ratio and gross debt service ratio, down to 44 percent and 39 percent respectively.

Although, these new rules may seem daunting to many first time home-buyers, the good news is that these new rules will surely push people to manage their debt better, and not take on more than they can afford.   Here’s some more interesting news. Believe it or not, 25 year home mortgages are nothing new in Canada. In fact, they were the standard for many years before the introduction of upwards of 40 year mortgages from many companies in more recent years.

With the debt to income ratio being at a record high in Canada at 153%, it should be noted that Canadians with mortgages have the highest amount of debt, owing about $160,000 on average.  This makes up a whopping 83% of all debt in Canada.  This can largely be attributed to the housing boom in the late nineties when many people took advantage of 40 year mortgages with no money down. Once, their 5 year term ended and these consumers went to refinance, many of them found themselves having negative equity in their homes, since they’ve paid very little down on the principle and the housing market in many parts of the country had weakened.  Multiply this situation by hundreds of thousands of times and you can begin to see the financial risk that these kinds of contracts can have on not just a single family, but an entire countries financial stability as well.

What it really comes down to is the age old scenario of tightening your budget in order to secure a more stable financial future for your family and your country.  Many people who currently have 40 year mortgages can manage 25 year amortizations as well with a little belt tightening.  If for some reason, these people can’t manage the lower amortization period, they should maybe consider the fact that they are not in the financial position to purchase a home at this time.  Although, that may be tough to say to some people, it will save them a lot of grief down that mortgage road.

Home Base Mortgages is a leading Toronto mortgage broker, which specializes in all types of mortgages ranging from home equity loans, second mortgages, private mortgages, mortgage refinancing, home mortgages and hard money lending.

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Mike Smith

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HBM

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