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A Need for Stricter Mortgage Lending?

Government intervention has a longstanding history of coming on the heels of an already established negative trend and Jim Flaherty’s announcements today for “action to strengthen housing financing” in Canada appears to be another case of just that.

Home ownership is at record highs, interest rates are at or near record lows and home prices over the past 8-10 years have doubled (or more) in many key real estate markets across the country.

2009 showed one alarming statistic according to CAAMP:

  • 18% of all mortgages in Canada in 2009 were amortized over more than 25 years with 47% of new home owners in 2009 electing for a mortgage amortization of longer than 25 years.
  • 19% were amortized over 30 years and 23% over 35 years

With the elimination of the 40 year amortization it appears new home buyers are still selecting the longest amortization in order to spread out the cost and ensure affordability of their first home. My opinions on home ownership are of a conservative nature and many friends and family have argued or disagreed with me about what risks are present currently in the Canadian real estate market. I think the moves today by the federal government, whether timely or not, indicate to current and prospective home owners that the market might not be as fairly priced as many believe and that financial prudence might be in order when considering your first mortgage. In my current household we determined the affordability of our mortgage not on our combined incomes but on the highest income exclusively. There were a number of reasons for choosing this approach but the most important was the fact that we wanted to ensure that one either one of us could carry all our combined monthly costs (aside from student debt repayment) on their income to create our own margin of safety. This allows us to have an adequate amount of savings now, in the future and a buffer if one of us wishes to stay at home part-time with our future family.

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