Mortgages made headlines today as our finance minister Jim Flaherty announced three new changes to the rules governing residential mortgage financing in Canada.
1. The maximum amortization will be reduced from 35 years to 30 years for government-backed insured (CMHC insured) mortgages with loan-to-value ratios that exceed 80% or more.
2. The maximum a borrower can refinance their existing mortgage will be reduced from 90% loan-to-value to 85% loan-to-value.
3. CMHC will no longer insure lines of credit secured by homes.
When I first read the news this morning I was disappointed to see that yet again for the 2nd time in as little as 12 months the Federal government stepped in to clamp down on the mortgage industry. The changes will effectively marginalize some borrowers. However, upon further reflection the Finance Minister’s decision is a wise and prudent one.
The changes weren’t introduced because there is a threat of a U.S. style crash. The Canadian mortgage delinquency rate is less than 1%. What Flarhety and his colleagues are angling at is a means to help Canadians save money. Over the past couple of months we have been reminded often in the media that Canadians are carrying more household debt today than ever before in our history. The rule changes are simply an instrument to help Canadians get on a debt diet and prevent us from over indulging on cheap and readily available credit through mortgage financing.
In the past I have briefly discussed the idea of sufficiency on this blog. Sufficiency is a very simple yet profound idea of living within ones means. For an excellent definition of Sufficiency click here. These rule changes introduced today aren’t about saving Canadians from an immediate crisis but rather a nudge to encourage us to become savers and to help us learn to live within our means. That is a message I believe should resonant with a lot of Canadians.