The Globe & Mail online site reports today that the federal government has announced plans to change the mortgage lending rules to pre-empt a housing bubble similar to what happened in the U.S.
Both the Finance Minister and Governor of the Bank of Canada had expressed concern in the surge of 40-year amortizations; feeling that they were contributing to a bubble situation.
CMHC mortgage insurance will no longer be available on amortizations over 35 years in length and buyers will also require a minimum 5% down payment. The intent is to prevent people from over-leveraging themselves into houses that they realistically can't afford and would most likely lose at the slightest upswing in mortgage interest rates.
In addition, buyers will require a minimum credit score of 620 along with stronger "documentary evidence" that buyers can pay their loans.
What does this mean to the buyers?
On a $200,000 mortgage at 6% interest, the reduction from 40 years to a 35 year amortization will mean an additional $41.00 on the monthly payment and will save them over $49,000 in additional interest charges.
The new rules come into effect on October 15, 2008.
P.S. The feds report that mortgage defaults are at 0.27 percent - near the lowest levels since 1990!
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