On March 18, 2011, another wave of mortgage changes will crash onto the shores of Canada’s housing market, as the Feds try to reign in the ever-increasing comfort level that Canadians have with debt.

These mortgage changes will apply to government-insured mortgages, where lending institutions would basically collect any losses from government insurers in the event of homeowners defaulting on their mortgage loans.

While the tightening of mortgage policies by the Feds may dampen some of the momentum of the Canadian housing market in the short term, the long-term benefit to Canadian homeowners cannot be dismissed. Long-term performance of the Canadian housing market depends on financially healthy homeowners who don’t end up underwater like many of our U.S. counterparts. Reducing lifetime interest costs, increasing equity levels, and promoting financially solvent homeowners will provide Canada with tomorrow’s home buyers, and these mortgage policy changes are keeping that goal in mind.

On January 17, 2011, Finance Minister Jim Flaherty announced the following mortgage changes:

1. Amortization periods will be reduced from a maximum of 35 years to a maximum of 30 years, where the down payment is less than 20 percent.
2. Refinancing of mortgages on existing residences will be reduced from 90 percent to 85 percent — following a previous policy change that saw a reduction to 90 percent from the boom-time peak of 95 percent.
3. The government will no longer provide insurance on what banks refer to as lines of credit, secured lines of credit, secured equity loans, and home equity lines of credit (HELOCS).

The first change is likely to have the biggest impact on first-time home buyers, as these consumers do not have equity already built-up in existing homes. The change to a 30-year maximum amortization period  — instead of a 35-year — creates a higher monthly payment, which will squeeze some potential home buyers out of the market, as they may no longer satisfy the qualification ratios of lenders. Buyers that are able to qualify at the 30-year amortization, however, will have more of their monthly payment going towards principal. It’s always important to keep in mind that although a 35-year amortization creates a lower monthly payment, over the life of the mortgage, that longer amortization period means a homeowner pays substantially more in interest when compared to a 30-year amortization.

An example of the total interest savings created by reducing from a 35-year amortization to a 30-year was illustrated in a recent article and cited from a comparison done by CCH Ontario Real Estate Law Developments. In this example, for a $300,000 mortgage loan with a 5 percent interest rate, the monthly payment increases from $1,504 to $1,601, a $97 increase, by using a 30-year amortization instead of a 35-year. The important thing to note from this example, however, is that the total interest savings over the life of the mortgage works out to $55,404 due to that reduction in the amortization period. That’s $55,404 more that the homeowner will have available during his or her lifetime. Over the long-term, that is a significant step toward increasing the future financial health of Canadian homeowners. This certainly helps to solidify the foundation for our future Canadian housing market to build on.

The other two mortgage changes take aim at what Finance Minister Flaherty referred to as Canadian homeowner’s common practice of using their homes as ATM machines. Lending institutions are bound to be much more scrutinizing of loans for high-ratio refinancing and home-secured credit products if they lack government-insured backing for these loans. Again, that ultimately keeps Canadian homeowners in better equity positions and reduces the lifetime interest burdens that many Canadians would incur otherwise.

Lending institutions are in business to do business and will always push to the fullest extent that government rules allow while competing to expand their mortgage portfolios — especially in the area of government-insured products where lender risk is mitigated. It is not realistic to expect any one financial institution to play the martyr and deter home buyers or homeowners from leveraging themselves to the fullest extent possible. As a result, mortgage policies must be handed down from the Feds to force an even playing field amongst lenders and to promote the financial health and viability of Canadians.

As the debt levels of Canadian’s soar — even while our U.S. neighbours try to rebuild from their own financial melt-down — the Feds mortgage medicine may be the appropriate inoculation to keep Canadian’s from picking-up a devastating case of the financial flu down the road. Maybe these mortgage policy changes are just another small dose of medicine needed to ensure a healthy housing market in Canada in the future and financially sound Canadian consumers. Let us know what you think?