Canadian Finance Minister, Jim Flaherty announced this morning at an 8:15 am conference that Canadian Mortgage Rules have been changed to avert a household debt crisis.
These will take effect July 9, 2012.
- Maximum mortization period for mortgages that the government will insure has been reduced to 25 years from 30 years.
- Maximum amount homeowners can borrow against the value of their home has been reduced to 80% from 85% of the homes total value.
- The GDS (gross debt service ratio) rose to 39% of a Buyers total gross income. Translation for a Buyer. Your total mortgage payment (interest plus principal) and the amount of municipal tax on the property you purchase, totalled together cannot exceed 39% of your gross income.
- The TDS (total debt service ratio) rose to 44% of total gross income. Translation for a Buyer. As well as the principal, interest and municipal taxes a mortgage institution will take into account any other outstanding loans you may have, including student loans, car payments, furniture and appliance loans. The payments for these in total cannot exceed 44% of your gross income for a one year period.
These measures have been put in place after discovering Canadians weren’t using the benefit of longer amortization terms or low interest rates to pay down their debt but to take on more debt with the attractive rates. With the average Canadian debt household increasing over the last decade, there is a risk that these same homeowners would not be able to meet their financial obligations if or when interest rates increase.
These measures have been put in place in light of a surge in household debt which has become our economy's largest domestic risk. Canada and Australia to name two, largely escaped the global financial crisis. These new rules will ensure Canadians don't end up in the same mess as our US counterparts.