Today, it was revealed that the Canadian Federal government is considering making it more difficult for borrowers to get mortgages. Although nothing has been announced, the Globe and Mail reported that several proposals are being considered.
Image: Danilo Rizzuti / FreeDigitalPhotos.net
The proposal that is getting the most consideration is the idea that borrowers will face greater scrutiny from banks to determine if they are financially stable. This is particularly true of borrowers who are taking on variable rate mortgages. The concern is that some of these borrowers will have difficulty making their payments when and if interest rates rise significantly.
Even if borrowers do not default on their loans when rates rise, their increasing payments will decrease their ability to buy other goods, weakening domestic demand and the economy’s recovery.
As mentioned earlier on this site, some experts have suggested raising the minimum required for a down payment from 5%, and to shorten the maximum amortization period down from 35 years. However, this would be politically unpalatable for Flaherty and Harper because it would anger potential buyers.
Instead – and this move is also being supported by the banks – the idea is to make the criteria that the banks use to determine if borrowers can afford their payments more stringent and uniform. In practice, this means that someone applying for a three-year variable rate mortgage will only be approved if they could also potentially afford a five-year fixed rate mortgage.
The concern about the ability of borrowers to afford their mortgage rates is spreading through the banking industry. ING has begun inserting information in new customers’ mortgage documents that tells them what their mortgage payments could potentially be if interest rates rise. David Dodge, the former head of the Bank of Canada, has even jumped into the debate and said, “CMHC (Canadian Home and Mortgage Corporation) should be very careful about the terms and conditions on which they’re giving mortgage insurance.”
What does this mean for you? First of all, due to the proroguing of Parliament, it is unlikely that this legislation will pass anytime soon. However, when it does, it will be relatively invisible to most consumers. And if you are financially well-positioned, it will not hamper your ability to get a mortgage at all.
As we’ve repeatedly counselled on this site, new borrowers should be always careful about what they are agreeing to when they sign their mortgage agreements. Interest rates could rise in the near future: it might be a wise idea to get a fixed rate mortgage anyway. And always consult with a financial advisor if you have any questions.
Heleen Jacobsen
Broker of Record with InfoMarket Group GMAC Real Estate
www.infomarketgroup.com
Elly Yeropoli
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