Mortgage Changes: Where things are going wrong

We've seen an incredible tightening of mortgage lending in the last year. In an effort to slow the housing market to prevent the same issues the U.S faces, the Canadian government has worked to make it more difficult to qualify for a mortgage. This change would result in less people qualifying to buy a home and cool a possibly over-heated housing market.

The main change often referred to is a decrease in the amortization of mortgages from 40 years to 25 years. Only five years ago, I was qualifying people using 40-year amortizations. Now on high-ratio mortgages, (or mortgages where borrowers put less than 20%) amortizations have been shortened to 25 years. On mortgages where there is at lease 20% equity in the home, the majority of lenders are offering 30-year amortizations.

Shortening amortizations has had two major effects: 1) On average people can qualify for about $40,000 less in a mortgage and; 2) it has forced people to pay down on their mortgage principal. While I agree it's important to be fiscally responsible, there are consequences to this tightening.

In Guelph and the surrounding area, home prices continue to rise. It's becoming more and more difficult for first-time home buyers to purchase a decent place to live within a reasonable budget. As a result, the rental market for residential homes has increased, spurring a buying spree of residential homes for rent. As a real estate investor myself, I see the benefits of owning rentals but I believe that we'll see a major exodus in the next five years; real estate investing is not as passive of an investment as the equities market.

While some aspects of mortgage lending have been tightened other areas have relaxed. When The Mortgage Centre (Guelph) first opened almost 15 years ago, we were approving mortgages based on the debt ratio calculations of the Gross Debt Ratio (GDSR) and the Total Debt Service Ratio (TDSR). These debt ratio maximums compare one's gross family income to the carrying costs of the home (GDSR) and the out-side debt one may have (TDSR). With the recent mortgage changes these debt ratio requirements have actually relaxed.

As a result, I see people taking from one debt source to pay down on another debt source. For example, using their lines of credit to pay on their mortgages (should there be a short-fall for that mortgage-payment period). An often-overlooked aspect in the U.S housing market crisis is the period of growth before the crash, which was based on consumer spending. George Bush is often recognized as encouraging Americans to "spend their way out" of the recession. With the current debt-ratio guideline in Canada opening, are we doomed for the same?

In closing, it may be time to revisit how the current mortgage lending policies are really affecting Canadians and what could be done to improve on a model that's envied by the world!

If you have any questions about your own mortgage situation please call my at 519-763-3900 ext.1001 or e-mail at lastovic.s@mortgagecentre.com.

I would also value your comments!