Jim Flaherty’s recently announced changes to mortgage rules reflect his views on where the economy and interest rates are going.
If your view is that interest rates are going to rise, and that rising interest rates will cause problems for Canadians who are carrying too much debt, then the changes to the mortgage rules make sense.
Flaherty has given CMHC new rules about which mortgages they can insure. Gone are long amortizations over 30 years. Gone are zero down mortgages. Gone is CMHC insurance for Home Equity Lines of Credit.
The minister of Finance seems to be of the view that Canadians are carrying too much debt, and that when interest rates inevitably rise, there could be an corresponding rise in consumer defaults. Jim Flaherty has moved to attempt to limit economic damage that could result from this scenario. No one wants to see anything that remotely resembles the carnage that has afflicted the housing market south of the border.
Mark Carney at the Bank of Canada echoes the minister’s views on the direction interest rates are taking and he agrees about that the amount of debt Canadians are carrying is excessive.
Most of the new rules will mainly affect new home buyers who will not be able to finance 100% of the purchase price of a home over 35 or 40 years, and those refinancing existing homes who will not be able to withdraw more than 85% of the equity currently in their homes.
Banks insist that eliminating the mortgage insurance for Home Equity Lines of Credit will not affect them, but Jim Flaherty has repeatedly commented that he thinks Canadians should be building equity in their homes against a rainy day, not treating them like piggy banks or cash cows that they can withdraw money from to buy toys like cars and boats.
The new mortgage rules take us back to where we were before the rules were relaxed a number of years ago. They should make it easier for Canadians to build equity in their homes and increase their personal wealth in years to come. If, as both the Minister of Finance and head of the Bank of Canada seem to believe, interest rates will be rising in the near future, Canadians should be well set to weather the storm and come out shining.