Federal Government Strengthens Mortgage Rules

Late last week the Federal Finance Department announced some tightening of mortgage rules, hoping to avoid the risk of a U.S. type housing bubble.

The biggest one is that 40-year mortgages are out. That is, the 40-year mortgages no longer qualify for mortgage insurance when there is less than a 20% down payment.

Now don’t be thinking that’s really sad. We’ve talked about the financial risks of that length of time already. Reducing a $200,000 mortgage to 35-years increases the payments by $40, but saves almost $50,000 in interest. So it’s a good thing – but didn’t go far enough, in my opinion.

The second rule change is that there needs to be at least a 5% down payment. Fair enough – because someone with no money down is buying a nightmare and it’s often speculators who contributed in huge ways to the U.S. housing meltdown, thinking they could buy it and flip it, without ever sticking a dime into the house.

The third one is that not anyone can get a mortgage. There needs to be a minimum credit score. But NONE of the media stories had the score. It took me some time to dig it up out of the regulations.

It’s a minimum score of 620 to qualify. Now nobody needs to panic. 620 is not anyone who has decent credit. That starts around the 700 mark, but it’s a very low threshold to avoid a lot of the subprime mortgages that set off the U.S. market. And subprime mortgages have been growing at 50% in Canada. The score is too low but it’s a great start by the Government, even if it’s a ways too low.

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