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Mark Carney's balancing act - To raise or not to raise (interest rates, that is)
2011-06-09 | 07:31:54
Posted: May 30, 2011 4:48 PM ET
Last Updated: May 30, 2011 4:48 PM ET
Mark Carney, the governor of the Bank of Canada, is expected to hold off on interest rate increases until the fall of 2011, analysts say. But there are those urging him to hike now. (Sean Kilpatrick/Canadian Press)
What is the 'overnight rate'? |
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The overnight rate is the interest rate at which banks borrow and lend one-day (or "overnight") funds among themselves. The Bank of Canada sets a target level for that rate, which is often referred to as the Bank's key interest rate or key policy rate. The chartered banks base their prime lending rates directly on the overnight rate. Currently, the prime rate is 3.00 per cent. Changes in the prime rate immediately lead to similar changes in rates for variable mortgages and lines of credit. |
| Source: Bank of Canada |
Eight times a year, the attention of Canada's financial world collectively turns to the governor of the Bank of Canada. On those select days — always a Tuesday — the central bank boss issues a short statement in the morning that attracts an extraordinary amount of scrutiny from a gaggle of analysts and bankers.
Why all the attention? It's because these statements are all about interest rates. This is where bankers, business people, homeowners and debtors all find out if the cost of money is going up or down — now and in the near future.
Raising and lowering interest rates is the Bank of Canada's primary tool to either jump-start the economy or try to cool it down. This is when Canadians find out if the interest rates on their variable mortgages or lines of credit are changing.
These days, the talk is all about the cost of money going up. The Bank of Canada's current overnight lending rate — the benchmark that everyone watches — is at just one per cent, even after three small increases of a quarter of a percentage point each in 2010.
That's still very low by historical standards — a deliberate policy decision by the central bank to encourage borrowing and re-inflate the economy after the bruising recession that began in late 2008.
With the economy now growing again and unemployment gradually falling, the Bank of Canada is now weighing a tricky decision — when and how quickly to resume rate hikes.
Too soon and too fast and it runs the risk of snuffing out the nascent recovery. But wait too long or hike too slowly and the steady supply of still-cheap money runs the risk of overheating the economy — a reality that typically manifests itself through unacceptably high inflation.
That's the delicate balancing act Mark Carney faces. And he has no shortage of critics — professional and amateur — with their own thoughts on the matter.
Why raise rates?
The main argument in favour of immediate and steady rate increases is that inflation is already above the central bank's stated comfort range of one to three per cent annually (3.3 per cent as of April). That thinking was behind the recent "raise rates now" recommendation of the C.D. Howe Institute's Monetary Policy Council.
The Organization for Economic Co-operation and Development notes that, at one per cent, Canada's key lending rate is still "highly stimulative." The OECD said the Bank of Canada should soon resume raising interest rates "at a moderate pace."
But the consensus among central bank watchers is that Carney won't be in any rush to raise. This crowd cites a number of factors:
- Economic growth (which was running at an annual pace of 3.9 per cent in the first quarter) is expected to soften in the next few months, largely because of supply chain disruptions to Canada's auto sector caused by the Japanese earthquake disaster.
- Canadian households remain highly indebted (the average family debt-to-income ratio has hit a record 150 per cent, the Vanier Institute of the Family reported earlier this year). Those debts are already causing many to cut back on their spending, with consumer spending flat or even negative earlier this year. Dramatically higher interest rates would weaken the ability of many families to cope.
- The Canadian dollar — already well above parity with its U.S. counterpart — is hurting the competitiveness of Canadian exporters. Increases in the key interest rate in Canada, in the absence of similar increases south of the border, would drive the loonie even higher.
- Stimulus spending by the federal government largely wound up a couple of months ago and the drive by all governments (federal and provincial) to cut back on spending in the future to eventually balance their books will be a drag on growth.
- The global economic picture is gloomier than it was a few months ago as the sovereign debt crisis sweeping through parts of Europe (notably Greece) keeps rearing its head. Growth in China is also moderating and, in the U.S., high unemployment levels and a persistently weak housing market are expected to continue to keep consumers cautious.
- While it's true that total CPI inflation in Canada is running at a hot 3.3 per cent, the core rate of inflation, which excludes such volatile items like energy and fresh fruit and vegetables, is just 1.6 per cent — not a level that the Bank of Canada needs to immediately worry about.
Faced with all the economic push-and-pull, analysts were almost unanimous in their views that the central bank's key rate wouldn't move on May 31. That was quite a change from just a few months ago, when many analysts were calling for a May hike. But that was then. While a few analysts are now calling for a July rate hike, most say that Mark Carney will likely hold off on making any hike until the fall.
"Recent communications from Bank of Canada officials suggest that they are not in a rush to raise interest rates in light of their growing concerns about developments such as the high Canadian dollar and the uncertain global economic climate," reads a recent briefing note from TD Economics.
The watchwords for the Bank of Canada — at least for the medium term — seem to be for a gradual phase-out of its low interest rate policy.
Look for an overnight lending rate of perhaps 1.75 per cent by the end of the year and a more "normal" overnight rate of three per cent by mid-2012, the markets are saying now.
But that will depend on how the governments, consumers and economies of the world behave in the months to come.
When is it worth it to break your mortgage?? Great Article.
2011-05-30 | 20:33:39
JULIE CAZZIN
Special to Globe and Mail Update
Published Monday, May. 30, 2011 7:37AM EDT
Last updated Monday, May. 30, 2011 7:43AM EDT
In this excerpt from the MoneySense Guide to Buying and Selling Your Home, a book in the "Best of MoneySense" series, writer Julie Cazzin looks at when it makes sense to break your mortgage.
Joakim Tjernell was pretty proud of himself—he’d done a damn good job of shopping for a mortgage. It was back in June of 2009 and Tjernell, a 32-year old translator, had been eyeing units in a slick modern condo building on Toronto’s Bathurst Street for a while. There was a lot of paperwork—Tjernell’s wife is a freelance graphic designer, so they had to prove that she had regular income. “This was the first time we had a mortgage, so we were nervous about getting approved,” he recalls.
But not only were they approved, their mortgage broker came through with a great offer on a variable-rate mortgage from Scotiabank. The $280,000 loan had a 25-year amortization and a floating rate of just 2.9% to start. Tjernell was sure he’d bagged a deal.
But last May he got an email newsletter from his broker suggesting that he could do even better. Tjernell thought that all variable-rate mortgages were the same, but that wasn’t the case. His original mortgage offered a rate of prime plus 40 basis points (there are 100 basis points in one percentage point). But the newsletter was offering variable-rate mortgages at prime minus 40 basis points. Was a difference of just 0.8 of a percentage point worth switching for?
When his mortgage broker ran the numbers he found out it was. Breaking his old mortgage to switch to the new one could mean a savings of more than $5,000 in interest payments over the life of Tjernell’s mortgage—enough for a nice vacation down south for him and his wife. “As soon as I realized that, I paid the $1,800 penalty, and kept the amortization period the same at 25 years,” he says. “I’m now saving $150 a month on my payments.”
If you’ve been watching rates lately, you may be wondering if you could break your mortgage to save a pile of cash too. The prime rate hit rock bottom in 2009 at 2.25% and it’s only risen slightly, to 3.0%, since then, meaning that depending on the discount you get from your lender, you can get a closed variable rate mortgage from 2.2 to 2.25%. The best available current five-year fixed rate is also a steal—it’s at about 3.8%, not far from its all-time low. (All rates were accurate as of March 2011.) Breaking your existing mortgage to switch to a lower rate could save you hundreds of dollars every month—or knock years off the length of your mortgage so you own your home sooner.
But you have to be careful. Your mortgage is probably the most complex contract you’ve ever signed. Make a wrong move and you’ll end up on the hook for penalties of $20,000 or more. The key is to run the numbers and get some advice before you approach your lender. Luckily, a quick analysis to see if you’ll come out ahead is relatively painless and free. Read on, and we’ll show you how to do it.
WHAT’S YOUR ULTIMATE GOAL?
Your first step is to decide what you want to accomplish. Most people are looking to do one of three things: to reduce the total cost of their mortgage, consolidate other debt (such as credit card debt) into their mortgage, or reduce their monthly payments, whatever the cost.
Keep in mind that lowering the cost of your mortgage can be done in two different ways. You can keep the total length of the mortgage—called the amortization period—the same and reduce each monthly payment. Or you can keep your monthly payments the same, and shave years off your amortization period so you’ll own your home outright sooner. Either way, you could save a pile of money.
WHEN IS IT WORTH BREAKING YOUR MORTGAGE?
The rule used to be that it’s worth breaking your mortgage when you can get a new rate that’s at least two percentage points lower than your current one. But that’s all changed. Because the rates are so low now, it’s worth switching for a much smaller drop. For instance, if you had a five-year fixed mortgage at 5.0% you might be eyeing the current rate of about 3.8%. That’s a difference of just over one percentage point, but it could reduce your overall interest costs by around 30% and lower each monthly payment by 15%, depending on your amortization.
Because each percentage point drop represents a bigger proportion of the total rate, the new rule is that if you see a rate that’s just 50 basis points lower than your current rate, it’s worth running the numbers. Depending on the penalty for breaking your existing mortgage, you could see big savings.
ARE YOU ALLOWED TO BREAK YOUR MORTGAGE?
In most cases the answer is yes. When you signed your mortgage document, you agreed to a whole slew of conditions, and one of them was likely a penalty for exiting your payment schedule before the current term is up (most terms are one, three or five years in length).
It doesn’t matter whether you do it by paying the whole mortgage off in cash, or by switching to a new mortgage—if you depart from the repayment schedule you agreed to before the term is up, you’re breaking your mortgage. Your lender will get less in interest payments out of you than you initially agreed to, so there will usually be a penalty. “When people buy a home they’re not thinking of breaking their mortgage,” says Vince Gaetano, principal mortgage broker with MonsterMortgage.ca in Toronto. “But the reality is that almost 40% of mortgage-holders will have to refinance and when they do, they’ll have to deal with their penalty.”
SO WHAT WILL BREAKING MY MORTGAGE COST ME?
There are penalties for breaking both fixed- and variable-rate mortgages, but the penalties for breaking a variable mortgage are usually much lower. “Any time you break a mortgage, the penalty may be too high to make it worth it,” says Kim Gibbons, a mortgage broker with Mortgage Intelligence in Toronto. “But you can usually recapture that penalty pretty quickly if you have a variable-rate mortgage.”
In this case, calculating that penalty is easy. Canada’s National Housing Act mandates that for variable-rate mortgages, the penalty is always equivalent to three months’ interest. For instance, imagine you have a $200,000 variable mortgage at 3.8%, amortized over 25 years. On this particular mortgage, let’s say your monthly payment is $1,030, and the interest rate portion is $627. Multiply that by three and you get $1,881. That’s your penalty.
WHAT’S THE PENALTY FOR BREAKING A FIXED-RATE MORTGAGE?
A fixed-rate mortgage has a much higher penalty. It’s also much more difficult to calculate what the penalty is. In broad strokes, the penalty is based on the interest rate differential, or IRD, which is the difference between the rate of your current mortgage and the rate the lender can now get for his money. It’s tricky to calculate, so you’ll likely need a mortgage broker to do it for you.
To show you just how stiff the penalties can be, Marcus Tzaferis, founder and chief economist of MorCan Direct in Toronto, estimates that a typical penalty for breaking a $200,000 five-year fixed-rate mortgage locked in at 5.9% after two years, given today’s 3% prime rate, would be roughly $12,000.
ARE THERE ANY OTHER COSTS?
Unfortunately, yes. Refinancing, or breaking your mortgage to switch to a new one, isn’t much different from applying for your first mortgage. So you’ll still have to fill in an application and go through a credit check. You may also have to do a title search, and there may be appraisal and inspection fees. The process can be quite lengthy and expensive—it can cost you $1,000 or more.
If you’re planning on selling your house in a few years, it’s probably not worth it. On the other hand, if you plan on staying put for the long run, refinancing can save you a bundle.
HOW MUCH CAN YOU SAVE?
Let’s run a few numbers to find out. We’ll start by looking at what happens when you break an existing variable mortgage to switch to another variable mortgage with better terms.
Imagine that you have the $200,000, 25-year variable mortgage that we described earlier. When you took the mortgage out, the rate you agreed to was prime plus 80 basis points. Right now, the prime rate is 3.0%, so your current rate is 3.8%. In this case, your monthly payment comes to $1,030. Of that, $627 goes towards paying your interest.
The new variable-rate mortgage you’re looking to switch to offers a better rate. Instead of charging prime plus 80 basis points, the new mortgage charges prime minus 70 basis points. Because of the lower rate, switching would save you $14,167 in interest payments over five years. As we mentioned earlier, the penalty for breaking your existing mortgage is equal to three months worth of interest, or $1,881. In addition, you would pay about $1,000 in administrative costs. So after the penalty and the admin costs, you would save $11,286 over five years. Is that worth it? Most people would say that it is.
Now let’s look at what happens when you break a fixed-rate mortgage to switch to a variable-rate mortgage. This situation is more complex, so we asked for Tzaferis’ help again to get us through the calculations.
In this case, let’s say you’re two years into a five-year $200,000 mortgage at 5.9%, and you want to switch to a variable-rate mortgage at prime, or 3.0%. You still have 36 months remaining on your mortgage, so if you kept the mortgage until the end of your five-year term, you would pay a total of $32,532 in interest over the remaining months. On the other hand, if you broke the mortgage and took the prime rate at 3% (and the rate stayed at 3% for the rest of your term) then you would pay $15,815 in interest over the next 36 months. So you would enjoy a savings of $16,717 in interest payments. Sounds pretty good, so far.
However, you still have to pay the penalty and administrative costs. As we mentioned above, a typical penalty for breaking your fixed-rate mortgage would be about $12,000, and you would pay about $1,000 in administrative cost. So your total savings will be about $3,700 ($16,717 minus the penalty of $12,000 and the $1,000 admin cost). In this case, it may be worth it, but only just. To calculate the total potential savings from breaking your fixed-rate mortgage, ask a mortgage broker to run a few scenarios for you. Many will do it for free.
FIXED OR VARIABLE?
In both the scenarios above, the new mortgage was a variable one, but a lot of people could benefit from switching to a new fixed-rate mortgage too. After all, the five-year fixed rate of 3.8% isn’t all that much higher than the 2.25% currently being offered for a closed variable rate.
So which kind should you choose? The decision ultimately comes down to whether you want a lower rate with more uncertainty, or a slightly higher rate that’s more predictable. Historically, the majority of homeowners have opted for variable-rate mortgages which go up and down with prime, and studies have shown that over the past couple of decades, those who went variable have done better. But some brokers say the past is not a good indicator of what the future will bring. That’s because interest rates have been slowly declining for decades, and now that they’ve hit the bottom they’re starting to creep up again. Rates may increase over the next few years, meaning that variable-rate mortgage holders could lose out. If that scenario could keep you up at night, you might prefer a fixed-rate mortgage, where the interest rate stays the same throughout the term of the mortgage.
WHERE CAN YOU FIND THE BEST RATES?
You may be tempted to walk into your local bank and sign on the dotted line for the first mortgage that you qualify for, but it pays to shop around. Long-term customers can get excellent rates from their banks, but you should also try out a mortgage broker. These are professionals trained to represent you, the borrower, in obtaining financing from a variety of lending sources. In most provinces, they are required to be licensed.
Because mortgage brokers are not employed by any one financial institution, they are not as limited in the products they can offer you. They can seek out the best mortgage to suit your specific situation, whether it’s with a bank, trust company, credit union or private funds. “I deal with over 50 lenders,” says Kim Gibbons of Mortgage Intelligence. “I try to get you the best deal and whoever wins your mortgage pays me a finder’s fee. There is no direct fee to the client.”
Stewart Wong and his wife Erin went to talk with a mortgage broker three years ago. “We didn’t know much,” says Wong, a 35-year-old communications manager at a non-profit organization in Toronto. “She did a good job educating us in terms of what to look for in a good mortgage. We wanted the ability to put lump-sum payments against the principal of the mortgage because we take our tax refund every year and apply it to the mortgage. We needed to be able to do that without a penalty.”
After you visit a broker, follow it up with a visit to your bank. Show them what the broker is offering you and see if they can do better. Finally, before you start looking around, make sure you actually have a choice. With some mortgages, if you want to renegotiate, it has to be with your existing lender, at least until the original term is up.
CONSOLIDATE YOUR DEBT
Until now, we’ve been assuming that you’re refinancing to lower the cost of your mortgage, but many people refinance to consolidate their debt too. In this situation, you’re looking to roll high-interest-rate debt—such as credit card balances—into your mortgage to simplify your debt payments and lower your interest rate. By doing so, you could reduce your rate from 19%—the typical rate on a credit card—to 3% or lower, and save thousands of dollars in interest payments.
That’s what Roxanne Saunders, 51, did this past August. At the time, she had $50,000 in high-interest rate debt on her HBC credit card. Hoping to retire in four years and clean up her finances, Saunders looked at the equity she had in her home—about $255,000 on a $430,000 condo—and renegotiated a $225,000 mortgage at a variable rate of 2.25%. She says it’s given her some much-needed breathing room in her monthly budget, paying $600 a month less in total debt payments than before she refinanced. “I think I’ve put the bank manager’s children through college with the money I’ve spent on interest payments over the years,” says Saunders. “But I plan to retire at 55, sell the condo and invest in a retirement property outside of the city. This plan works well for me.”
LOOSEN THE NOOSE
The final reason many people refinance isn’t a happy one: It’s because they’re struggling to make their monthly mortgage payments. This is often due to unemployment, illness or some other unforeseen circumstance. In this case, the goal is just to get those monthly payments lower, no matter what the cost. And unfortunately, there often is one: you can end up paying more over the long run as a result.
The typical strategy in this case is to lengthen the amortization period, for instance to break a 25-year mortgage and get a 35-year one. Each payment will be lower, but you’ll be making them for 10 more years, so the total cost of your home will be higher. If you’re lucky, you’ll be able to refinance at a lower rate. That will help to offset the longer amortization period, and you could even come out ahead.
WHAT ARE THE RISKS?
When you refinance, you face the same hazards that can trip up any borrower, whether it’s your first mortgage or your third. Unscrupulous lenders can tack inflated fees onto your new mortgage, some of which they may not disclose up front. They could also introduce new, higher penalties for breaking the new mortgage. “Many financial institutions don’t give you a concrete idea up front of what the penalties for breaking your mortgage actually are,” says Gaetano of MonsterMortgage.ca. “Often what the penalties actually are, and what you think they are, can be two different things.”
To prevent any nasty surprises, after your lawyer has read your mortgage, you, too, should sit down one evening and read it from start to finish. If at any time you don’t understand a particular statement or clause, make sure to get it clarified before signing.
It’s not going to be the most entertaining evening of your life, but Sandra Martin, a magazine editor in Toronto, did it and she’s glad she did. Before she and her husband Matthew James signed their “very thick” mortgage document, they each sat down and read the whole thing through. To their surprise, they found a mistake that could have cost them thousands of dollars.
EVEN MORE WAYS TO SAVE
If you get the big stuff right, you’ll be fine. But you can do even better if you get the details right too. For instance, when you’re considering a new mortgage, ask if the interest is compounded monthly or semi-annually. The less frequently the interest is compounded the better—semi-annual compounding could save you hundreds of dollars. Also, ask how often the rate changes. Most variable mortgages have rates that fluctuate monthly. However, there are several that only change every three months. This offers you more protection when rates are rising.
Finally, consider the prepayment options. The last thing on your mind when you take out a mortgage may be whether the bank will let you pay more than the minimum, but this is important. Four years from now, your salary might be higher, and if you’re allowed to pay extra, it goes straight to the principal and can knock years off your mortgage.
Most mortgages allow you to prepay between 10% and 25% of the mortgage principal annually. But Chad Robinson, president of Verico Best Interest Mortgages in Ottawa, says that it’s a growing trend to offer customers a “No Frills” product that severely limits your ability to prepay and can even make it impossible for you to switch from one lender to another entirely until the term of the mortgage is up. “One Canadian bank is offering just such a mortgage,” says Robinson. “The rate appears attractive; however savvy customers can find equal or better rates without the handcuffs.”
Finally, if you have a prepayment option on your mortgage and you plan to refinance, make your annual prepayment—usually between 10% and 25%—before getting the penalty calculated. If you don’t have the money, your mortgage broker will often give you a one-day loan, so your penalty can be reduced. “Very few people use this key option before having their mortgage penalty calculated,” says Tzaferis of MorCan Direct. “But this simple step can save you hundreds of dollars up front.”
Five signs it’s time to renegotiate your mortgage
1. You can get a rate at least half a percentage point lower than your current rate. In the past, the rule was it wasn’t worth breaking your mortgage for a new one unless the new rate was at least two percentage points lower, but with mortgage rates at historical lows, even a small drop of 50 basis points can mean paying hundreds less every month.
2. You want to pay off your house sooner. You can refinance to shorten the length of your mortgage and pay less in interest over the long run. Refinance at a lower rate, and you’ll save even more.
3. You have a lot of credit card debt. If you have enough equity in your home, you can refinance and roll your credit card debt and other loans into your mortgage. That can mean a drop in the interest rate from 19% to 3% and thousands of dollars of savings.
4. You want to convert a variable-rate mortgage into a fixed-rate mortgage. Many economists say interest rates will be heading up soon. If you want to lock in, now’s the time. As of mid-November, the five-year fixed rate was only about 3.8%—not much higher than its lowest point ever.
5. You can’t afford your payments. Lenders don’t like foreclosing on homes, so they’ll often help you refinance instead. Depending on the kind of mortgage you have and the amount of equity you have in your home, you may be able to extend the term of your mortgage loan and reduce your monthly payments.
Excerpted from MoneySense Guide to Buying and Selling Your Home (Rogers Publishing Limited, $9.95). The book is available at bookstores and newsstands or online at http://moneysense.ca/myhouse
DLC president bends the ear of Finance Minister
2011-01-21 | 13:53:19
The following is a summary of the day, submitted by Mauris.
- Gary Mauris, president, Dominion Lending Centres
2011-01-18 | 12:38:13
Carney keeps rate at 1%
Bank of Canada raises estimate for economic growth
Last Updated: Tuesday, January 18, 2011 | 1:04 PM ET
CBC News
The Bank of Canada elected to hold its benchmark overnight lending rate steady at one per cent in its latest policy decision on Tuesday.
"The global economic recovery is proceeding at a somewhat faster pace than the bank had anticipated, although risks remain elevated," the bank said in a statement.
"Any further reduction in monetary policy stimulus would need to be carefully considered."
The statement gave no clear indication as to when the bank might start raising rates again.
After cutting the rate to a record low of 0.25 per cent during the recession, the central bank raised the rate in June, July and September before standing pat in its three policy decisions since then.
Economists were expecting the bank to not change the rate — especially after the federal government moved to cool the housing market further on Monday by tinkering with mortgage rules.
However, the C.D. Howe policy council recommended last week that the time had come to start edging the rate toward meeting a target of 2.5 per cent by the end of the year.
BMO economist Michael Gregory predicted in a commentary released after the announcement that the bank would resume increasing rates in May.
With the Canadian dollar already strong, he said the bank "is going to want to see a persistent" improvement in the U.S. economy to avoid any American downturn that would push the loonie higher and make Canadian exports less competitive.
On the other hand, Pascal Gauthier, senior economist with TD Economics, predicted the bank is more likely to hold off until July before increasing rates while it waits for the U.S. Federal Reserve to finish its massive program of bond buying aimed at stimulating the American economy.
The bank usually signals a move in rates ahead of time. Its next statement in March "will be crucial to help determine whether markets should reasonably expect that to be as early as the spring or in the summer," said Gauthier.
High dollar a worry
The bank signalled it is clearly worried about the Canadian dollar, which is trading over parity with the U.S. currency, and the low productivity of Canadian businesses.
In its last projection, the central bank expected the loonie to remain around the 98 cents US level. But the dollar has been trading above parity with its U.S. counterpart for all of 2011 so far. The loonie was trading 0.54 of a US cent lower, to 100.78 cents, on Tuesday.
The loonie slid on the interest rate news even as the U.S. dollar weakened against other currencies including the euro.
"The cumulative effects of the persistent strength in the Canadian dollar and Canada's poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada's current account deficit to a 20-year high," the bank's statement said.
The bank projects the economy will expand by 2.4 per cent in 2011 and 2.8 per cent in 2012 — a slightly firmer profile than had been forecast in October.
Core inflation is projected to edge gradually up to two per cent by the end of 2012, as excess supply in the economy is slowly absorbed.
The bank did not change its target date for when it expects the economy to return to full capacity from the end of 2012.
As well, the bank continued to stress that risks to the global recovery remain "elevated" because of large government debt buildups, particularly in Europe, and the poor financial positions of international banks.
The bank will issue a new comprehensive outlook on the economy on Wednesday, when its intentions over interest rates might become clearer.
NEW MORTGAGE RULE CHANGES 01.17.2011
2011-01-18 | 12:30:46
OTTAWA—Finance Minister Jim Flaherty has tightened up mortgage rules to tackle growing household debt in Canada.
“We are seeing people borrow to the max,” he said.
The measures put new restrictions on borrowing against the value of a home and reduced amortization allowing Canadians to pay off their homes more quickly.
“Canada’s well-regulated housing sector has been an important strength that allowed us to avoid the mistakes of other countries and helped protect us from the worst of the recent global recession,” Flaherty said.
“The prudent measures announced today build on that advantage by encouraging hard-working Canadian families to save by investing in their homes and future,” he said.
Ottawa moved to reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortages with loan-to-value ratios of more than 80 per cent.
It also lowered the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes.
“This will prevent Canadians from taking on excessive debt,” Flaherty told a news conference, noting that Canadians in some cases are remortgaging their homes to buy boats and other large ticket items instead of reinvesting in their homes.
The Finance Minister also withdrew government insurance backing on lines of credit secured by homes, such as home equity lines of credit.
He explained this will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.