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Rob Carrick

New mortgage rules will bite Add to ...

Warnings about excessive debt loans have been as frequent as weather reports in the past year, but you didn’t listen.

So now the federal government is clamping down on the growth in borrowing by effectively eliminating 35-year mortgages for people who need mortgage insurance, lowering the ceiling on mortgage refinancings and removing government backing for lenders selling lines of credit to clients.

There’s a federal budget coming up in a month or two and speculation that anti-debt measures would be included was starting to build. The fact that the government moved early suggests a degree of concern that indebted Canadians are headed for trouble once interest rates start rising.

“You can totally realize why the finance minister is imposing these rules,” said John Cocomile, a Toronto mortgage broker and lawyer. “As interest rates nudge up, people won’t be as pressed as they might have been.”

The new measures will bite. Mr. Cocomile said that nine of ten first-time buyers coming into his office have gone with a 35-year amortization instead of 30 or 25 years. The longer the amortization, the lower your monthly payments.

Mr. Cocomile used the example of someone who wants a $200,000 mortgage and can arrange a variable-rate mortgage at 2.3 per cent. The monthly payments work out to $692 per month with a 35-year amortization and $770 per month at 30 years.

“It doesn’t sound like a lot,” he said. “But if someone’s trying to get into a place that’s almost out of reach, they’re not going to be able to get as much house with the 30-year ceiling.”

The lower amortization for people who have less than a 20-per-cent downpayment takes effect March 18. In addition, the government is also lowering the maximum people can borrow through a refinancing of their mortgages to 85 per cent of the value of their home, down from 90 per cent.

Mr. Cocomile said these refinancings have been popular with people who have multiple debts that typically include credit cards, where the interest rates are often in the 19-per-cent range. The idea is to roll higher-interest debt into the mortgage, where interest rates are low.

The crackdown on lines of credit, effective April 18, will happen in the background. It affects lenders offering lines of credit and has no direct impact on borrowers. After providing lines of credit to customers, lenders can pool these loans and then obtain mortgage insurance for them.

Now, the government is withdrawing its insurance backing of these lines of credit. Lenders will be on their own, and it’s reasonable to expect them to be a lot tougher about who gets one. As for people who already have home-equity lines of credit, Mr. Cocomile said they should be unaffected.

Let’s be clear - what was announced today is designed to quell growth in borrowing. There’s nothing here to knock some sense into the people who have already bought houses that stretched them too far or who have run their lines of credit to the maximum.

At 1 p.m. (ET), personal finance expert Rob Carrick joins us for a live discussion about what to expect as the changes kick in.

You can set an e-mail reminder for yourself in the Cover It Live box below. Mobile readers can join the discussion by clicking here.

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