Starting July 9, the dream of owning a home will slip a little further away from many Canadian families.
That’s when the Bank of Canada’s new, tighter regulations, announced late last week, come into effect. Here’s a roundup of what’ll change:
• The maximum amortization — that’s the number of years over which you can spread out your mortgage loan repayments — shrinks to 25 years from 30 years.
• If you’re refinancing, you need to maintain at least 20 percent equity in your home, up from 15 percent. To put it another way, the maximum you can borrow is 80 percent of your home’s value — so if your home is worth $400,000, your mortgage can’t exceed $320,000.
• You won’t be approved for a mortgage that eats up more than 39 percent of your income before taxes and other deductions (called your gross personal income), and your total debt-service ratio — the proportion of your income eaten up by your mortgage payment, property taxes and other related costs — will not be allowed to exceed 44 percent.
• The government won’t insure mortgages on homes worth more than $1 million.
For most of us, I don’t think that last rule applies! But having to pay off your entire principal in 25 years, especially if you’re a first-time homeowner and especially if you live in an expensive market like Toronto, might make it even tougher for many families to afford even a modest condo unit or house. (Some may still qualify for what’s called a high-ratio mortgage — when you get permission to borrow more than 80 percent of the value of your home, provided you pay an insurance premium to the Canada Mortgage and Housing Corporation.)
The central bank’s motivation is to protect Canadians from over-borrowing. Many of us, they know from the statistics, are living paycheque to paycheque — and even though we’re still covering all of our bills, we’re vulnerable. What if interest rates go up? What if our partner is suddenly out of work? There’s real concern that Canadians are in too much debt, and limiting the amount we can borrow for our homes, and how long we can take to pay them off, is meant to help limit our debt load.
Trouble is, the maximum allowable mortgage load is still a huge chunk of people’s incomes. Add in a daycare bill, and many families won’t qualify for a mortgage with the “no more than 44 percent debt-service ratio” rule. So they’ll continue paying rent month after month, never building equity and still not having much, if any, spare cash left over for savings.
I see where the government is going with this, but it isn’t a full solution. What’s your opinion: Are mortgages too hard, or too easy to get? Sound off here.