Many potential home owners in Canada are reeling from recent mortgage changes introduced by their federal government. Yet the Canadian administration believes that the modifications will make a positive difference in people's financial health. The regulatory changes are meant to save consumers from themselves in terms of debt load. The government is hoping to discourage potential home owners from taking on debt that they cannot handle in reality. As well, the regulations aim to discourage unwise use of home equity lines of credit.
Helpful Advice
Now many people will argue that consumers should not be prompted in one way or another; they should make their own decisions and live with the consequences. Of course, too little regulation can also cause financial woe. Consider the recent U.S. dilemma. Mortgage approval might have been too easy in some instances; many consumers became homeowners but lacked the financial means to handle the commitment.
Mortgage Changes
(Canada)
According to Canadian Finance Minister Jim Flaherty, effective March 18, 2011, the term of government-backed mortgages has been lowered to 30 years from 35 years. As well, the maximum amount of equity for refinancing will drop to 85% from the previous 90 per cent.
Many hopeful first-time home buyers are not pleased with this recent development. Yet the government insists that they are helping consumers. Eventually, homeowners will be faced with a rise in interest rates. This latest intervention is designed to discourage buyers who will not be up to the challenge.
Massive Debt
According to recent statistics, Canadian household debt has soared to 148% of disposable income. Of course, shopping trips and house sales fuel the economy but there is an 'elephant in the room' with such a high percentage of debt. The Canadian government has chosen not to ignore the massive amount of debt carried by many home owners.
Beginning April 18, the Canadian government will stop insuring newly issued home equity lines of credit (HELOCs). An ever-increasing number of home owners in Canada are using these lines of credit. In fact, HELOCs account for 12% of consumer debt.
Home Equity Lines of Credit
Actually, 50% half of these variable-rate loans are spent on consumer goods including new cars and boats. Only one third of the loans go towards paying down other debt. Therefore, the Canadian Mortgage and Housing Corporation has reconsidered its practice of insuring home equity lines of credit.
Government Regulations
With recent mortgage changes, the Canadian government claims to have considered the best interests of consumers. Of course, distancing themselves from the inevitable future rise in interest rates might be a wise move for this government – especially with a possible election in the near future. As well, in 2006, this government allowed the Canada Mortgage and Housing Corp. to lift its 25-year limit on mortgages and insure up to 40 years.
In 2008, Flaherty rewound the 40-year term back to 35 years. Maybe this latest move is an attempt to distance themselves further from that original rash decision of extending limits to 40 years. The Canadian government, however, has to be prepared for their new regulations to have a few undesirable effects on the economy. Almost one third of Canadian mortgages in 2010 were for 35-year terms.
Do You Think The Canadian Government Made Sensible Mortgage Changes?
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