Getting a mortgage in Canada

Mortgage Refinancing 2 Pictures, Images and Photos

The Canadian federal government announced yesterday that it will be tougher for some Canadians to obtain a mortgage in Canada and borrowing money against their home will be tighter too. Clearly, the government is concerned with the high debt levels that Canadians are amassing and these tighter rules are aimed at limiting that. It is also clear that they are trying to put in practice the lessons they learned from the U.S. financial crisis.

Leading up to the financial crisis, Americans made a habit out of borrowing money against their homes. By subtracting the amount left owing on their mortgage from the appraised value of their home, they were able to obtain the difference as a loan/line of credit from the bank. Since homes kept increasing in value, people would be able to do this again and again. Well, that created a massive household debt problem and the minute homes stopped increasing in value, all those people and the banks that provided the loans were in big trouble. The other type of mortgage refinancing, called cash-out refinancing (which I won’t spell out right now) was also common and had the same consequences.

This is exactly what the Canadian government is trying to avoid. The new rules limit the amount a person can borrow when refinancing to 85% of the value of their homes, down 5% from where it is currently. The new rules also reduce the maximum length of mortgages to 30 years, down 5 years from where it is now. The maximum mortgage length only applies to mortgages with 20% down payments or lower.

Over time, these new rules are likely to help limit the amount of debt people have, at least debt coming from their home. However, it carries the risk of stalling the real estate market which could negatively impact the economy. If this happens then these new rules will have completely backfired. Time will tell if this was a good decision or not.