Today's announcements include:
- Reducing maximum amortization to 30 years
- Reducing Loan to Value of refinances from 90% to 85%
- Removing the ability to insure high ratio HELOCS (Home Equity Line of Credit)
The most significant of which is reducing the available amortization period. The 35 year (and even 40 year) amortization is not the cause of household financial woes in Canada. Reducing the amortization does little to nothing to reduce Canadian debt loads. The impact of reducing the amortization period will be to simply reduce the amount of mortgage a home-owner or prospective home-owner can qualify for. This means a trickle down which will take some first time buyers out of the market and put additional downward pressure on house prices. This measure effectively penalizes those who purchased with a 35 or 40 year amortization in previous years, and therefore were willing to pay a higher amount for a home because of the reduced carrying cost of an extended amortization.
If a household is prepared to spend $1000/month on housing then that number is not going to change because of a reduced amortization. It simply means they can buy less house leaving a smaller market for those trying to sell their home, who perhaps purchased with a higher amortization. The only real impact this change has is to increase the likelihood that those that purchased at the peak with minimal equity will end up with negative equity. This does not alleviate problems but in fact causes more problems. People are more likely to ‘walk away' from an asset with negative equity in tough times rather than fight through to protect an asset with real or perceived long term value. Mr. Flaherty you are effectively jeopardizing the equity that you purport to be protecting.
To see the full announcement visit the Government of Canada's web site.
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