As of today, Canadian mortgage rules changed. But many homeowners aren’t familiar with the alterations or how they’ll affect their mortgages going forward, says a BMO poll.
Lenders can now only issue home equity loans up to a maximum of 80% of a property’s value, down from 85%, and the maximum amortization period has dropped from 30 years to 25 years—giving borrowers less time to repay their household debt.
The poll revealed almost half (49%) of Canadians are unfamiliar with the new measures put in place by Finance Minister Jim Flaherty. And even less (45%) realized the amortization period has been shortened by five years, with a quarter (26%) saying it’s more than 30 years.
It’s important that Canadians remain up-to-date on rules and regulations that have a direct impact on their financial plans, goals and overall stability, says Laura Parsons, mortgage expert at BMO.
“For two years now, we’ve been talking to our customers about the financial implications of carrying debt over the long term and how opting for a maximum 25 year amortization can help them manage and meet long-term goals,” says Parsons.
She adds, “The recent changes have an effect on how Canadians purchase property, so it’s more important now to seek clarity on the current guidelines in place.”
BMO Economics noted the new measures will help ease the overall burden of household debt in Canada and will have a significant impact on moderating the Canadian real estate market.
“To neutralize the impact of the amortization rule change on mortgage payments, average home prices would need to fall about 3%, says Sal Guatieri, senior economist of BMO Capital Markets.
He adds, “By helping to cool the market now, the changes should increase the odds of a soft—rather than hard—landing.”
The poll also revealed how the new guidelines will affect buying intentions and behaviours:
- 14% of prospective homebuyers say the latest changes make it less likely they will buy a new home in the next five years
- 41% of those still planning to buy say these changes make it more likely they will spend less on a home than they would have otherwise
- Nearly half (45%) say it makes it more likely they will take out a smaller mortgage
Parsons says the rules appear to be having the desired effect if Canadians are planning to borrow less and buy less expensive homes as a result of the changes.