Seemingly just yesterday, there were significant changes made to the way mortgages work in this country. And now as 2010 starts to rev up, Minister of Finance Jim Flaherty, is considering even more changes to the Canadian mortgage rules. Flaherty is hoping that by creating tighter rules for lending, the government will be able to prevent Canada from experiencing the type of economic downturn that the American market has seen over the last couple of years.
In 2008, lending rules in Canada became more conservative with the removal of 'no money down' offers and 40-year mortgage terms. Also affected were home equity lines of credit, which can no longer be worth more than 80% of a home's value.
In 2010, Flaherty is again looking to reduce the length of allowable amortization periods—this time from a maximum of 35 years, down to 30. He is also considering increasing the minimum down payment required from 5% to 10%.
Unlike our southern neighbours, the Canadian real estate market saw a great deal of activity in 2009 — much of it due to low interest rates. With favourable rates and high activity, there is concern that Canada is developing a housing bubble that will inevitably burst. The government is trying to prevent this from happening by cooling down the market.
During America's housing boom, thousands of buyers got in over their heads by purchasing homes with subprime mortgages and interest-only loans. As soon as interest rates shifted, these homeowners could no longer afford to make their payments, and their homes went into foreclosure.
The foreclosure epidemic has gone on to affect the entire economy, with people losing their homes and jobs, and people being unable to find affordable housing. This is something that we'd definitely like to avoid in Canada, and perhaps making it tougher for people to buy homes is one way to prevent it.
Though the proposed changes to the mortgage rules will make it more difficult for people to buy real estate (particularly for first time buyers), these changes are not designed to punish anyone. The goal is to ensure that buyers entering the real estate market can actually afford to do so. These rules are being considered as a way of protecting individuals from going underwater, as well as protecting our economy as a whole. We're fortunate as Canadians because we can learn from the mistakes made in the States that precipitated the foreclosure crisis.
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