Mortgage News

Mortgage news & commentary from Lou Perrotta, CPMB

Weekly Commentary for January 25, 2011

What is the Federal Finance Minister trying to do …

Last week the Honourable Jim Flaherty announced three new rules for government-backed insured mortgages:

New Rule # 1:

Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.

This change will go into effect on March 18, 2011.

According to Mr. Flaherty’s announcement: “This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.”

New Rule # 2:

Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes.

This change will go into effect on March 18, 2011.

According to Mr. Flaherty’s announcement: “This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.”

New Rule # 3:

Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs.

This change will go into effect on March 18, 2011.

According to Mr. Flaherty’s announcement: “This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.”

Here’s what I think about new rules #1 and #2 …

These changes are intended to scale back the rises in real estate values and to reduce consumer debt loads. In my view, they will achieve neither objective.

Rises in real estate prices are caused by demand and by speculation by investors, during the initial stages of an economic recovery. Although demand has been somewhat tempered from the peaks of the past few years, resale and new home sales are still occurring at healthy levels. The value of these markets has not stagnated and I don’t believe Mr. Flaherty’s new rules will change that.

As long as employment continues to grow in Canada the demand for housing will be fuelled. I believe that we are in the initial stages of an economic recovery. Real estate prices will rise modestly and sales will continue.

Here’s what I think about new rule # 3 …

With respect to the restrictions on insuring home equity lines of credit and equity withdrawal for debt consolidation, this will be very nice for banks and credit card companies; not so good for consumers.

Debt is debt whether it is in the form of mortgage loans, car loans, credit card accounts or leases. Usually, the cheapest debt that is available to consumers is mortgage debt. If a consumer has a high debt load and he or she has equity in a home, one very practical option for a consumer is to consolidate those debts and reduce the interest costs and instalment burdens.

Our economy is consumer driven. By removing or restricting this option for consumers, many people will now be forced to continue managing their current debt burden with the more expensive options.

Personally I think it would be more helpful if Mr. Flaherty redirected some the federal government’s advertising spending into educating consumers, especially young people, in the wise use and management of credit.

New government regulations may not help you, but DOMUS can …

If you are over-burdened with debt and wish to discuss your debt-relief options, we would be pleased to assist you. All inquiries will be held in the strictest confidence.