Mortgage restrictions cool down market, leave buyers in a pickle

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Much like the rising and setting of the sun, some things in life are just givens – death, taxes, bad reality TV shows.

Well, now you can add insurance to the list.

Just as most Canadians must shell out money for insurance to drive a car, the majority of Canadians must spring for insurance to buy a home. For homebuyers with less than 20 percent equity, paying for mortgage insurance is mandatory.

According to the Canadian Real Estate Association (CREA), the average home price in Canada is $350,192. That means that putting down 20 percent would run the average citizen $70,038 – a hefty chunk of change that most buyers can’t afford out of pocket.

Fewer than four in 10 buyers can afford a 20 percent down payment, according to the Canadian Association of Accredited Mortgage Professionals.

Unfortunately for prospective buyers, mortgage insurance has become increasingly difficult to obtain as more restrictions are added.

Since most Canadians are required to obtain insurance to buy a home, and insurance has become more difficult to get, the Canadian housing market will be affected, which, as it turns out, is the point.

Finance Minister Jim Flaherty has changed mortgage rules four times now in an attempt to slow down mortgage borrowing. The latest restrictions decrease the maximum length of an insured mortgage from 30 years to 25 years, as well as lowering the amount homeowners can borrow against the value of their homes from 85 percent to 80 percent.

“I was concerned about the level of indebtedness related to residential housing, including condominiums,” Flaherty said in an interview with The Globe and Mail. “Four times we intervened in the mortgage insurance market in the last four years. And it is working. In fact, what I am seeing now in the most recent data is quite clear evidence that there is no boom. There had been the potential for a boom, but even the Toronto and Vancouver markets have calmed, including the condo markets.”

Many industry professionals agree that these restrictions are helping to cool down the Canadian housing market. The CREA reports that sales have decreased dramatically, while rising home prices have slowed as well.

Numerous prospective buyers, especially first-time buyers, have found themsevles unable to obtain mortgage insurance, forcing them to remain renters. 

It’s a catch-22 for Canadian citizens, one that can lead to frustration on the part of prospective home buyers.

According to Flaherty, however, it’s necessary to prevent a housing bubble that could seriously harm the Canadian economy.

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