The Canadian government is tightening up mortage rules in hopes of preventing people from incurring too much household debt. The new rules will affect amortization periods, the limit for borrowing against a home, the maximum gross-debt ratio and total debt-service ratio. These new rules have been ushered in as a response to Europe’s current financial crisis and record-low interest rates that are causing some analysts to warn that the housing market may currently be overvalued.
As recently discussed in the Financial Press, the new rules will come into place on July 9th. Based on these new guidelines, the maximum amortization period for government-insured mortgages drops to 25 years from 30 years. The limit for borrowing against the value of a home drops to 80% from 85%, while the maximum gross-debt ratio is fixed at 39%. The total debt-service ratio will be 44%. Last but not least, there will be a new rule that limits government-backed mortgages to homes purchased for less than $1-million.
The government is trying to limit people from overspending, but have been reluctant to actively do anything before now. They had previously encouraged banks to turn people around at the door if they were not fit to get a loan, but they have changed their attitude towards solving the problem. This has been brought on by a continual growth in household debt and the european fiscal crisis. The rules are an attempt to curb the possible impact of a european collapse on the Canadian economy.
Debt-to-income ratio in Canadian households has reached a record setting high of 152% and is indicating that consumers are getting in over their heads on borrowed finances. The Bank of Canada is also warning consumers to be prepared for the shock waves from Europe should their banking and housing market slide any further.
Bank of Canada governor Mark Carney supported the new rules being brought in by the Canadian government as necessary measures to protect Canadians from themselves.
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