The financial crisis of 2008 was a memorable event worldwide. Central banks want to prevent another catastrophic event like that. The Bank of Canada’s role is to provide favorable conditions for the Canadian economy to grow which in turn benefits its citizens. Zooming closer in, my value to you is much the same: to guide you in your financial decision making so that you achieve your long term goals.
If you have been a reader of my posts for a few years, you might remember a newsletter about how the government and Bank of Canada made borrowing money so cheap that Canadians could not help but borrow money, to buy houses, cars, charge their credit cards, etc. It got to the point where there must have been a tinge of regret in Ottawa. The past few years have seen a gradual increase in regulation for mortgages. It is a reversal of the cheap money policy. The host has declared the party is over and taken away the punch bowl.
There are 2 risks in the Canadian economy that the government and now the Canadian Mortgage and Housing Corporation(CMHC) are concerned about and want to mitigate. Number one is that Canadians have far too much debt, and in many urban centres of Canada houses are overvalued. These 2 factors create the probability of a bubble such as occurred in the US. Because the debt to income ratio is somewhere around 160% it would only take decrease in income for any number of reasons to put a homeowner in trouble.
The past few weeks have seen new regulations with respect to home purchases. I will highlight the most important ones.
First of all the sale of any home by a taxpayer must be declared on a tax return. If you want more details please contact me.
We all know the maximum amortization is 25 years, and that any down payment less than 20% is subject to CMHC insurance.
On October 26th the CMHC is going to categorise Canada’s housing market as a strong risk, upgraded from a moderate risk.
On October 17th all potential homebuyers wanting to get a guaranteed mortgage will now be subject to a stress test. Previously the test was only administered to high risk mortgages. One mortgage provider has estimated that up to 30% of mortgages recently granted would have failed this new test. The stress test will measure the potential homebuyer’s ability to make mortgage payments when interest rates increase. The test uses a rate of 4.64%, which is the average of the rates banks currently charge.
I am going to be incorporating a variant of this test in our client meetings from this date. It is very important that you know in advance that you could pay your mortgage when your monthly payments increased. My value to you lies in my ability to get you to look at all of your financial statistics in the big picture. Every financial decision you make will impact that big picture and much of financial planning is prevention. Please access my expertise and experience as we work together to ensure your definition financial success.