I have noticed that the Canadian government have shortened the maximum mortgage term in their country from 30 to 25 years. This is the fourth time in four years that they have tightened rules around mortgages. This time, following on the back of reducing the amount you can borrow for remortgaging from 85% to 80% of the value of your property.
The Canadian government says that these recent measures were taken to reduce the total interest payments Canadian families make on their mortgage, helping them build up value more quickly and pay off their mortgage debt sooner. With regard to limiting the amount of refinancing they believe it will encourage home owners to prudently manage borrowing against the value of their properties and keep equity in their home.
The Canadians appear to have managed their housing market better than their neighbours in the United States and the European market, with steady above inflation rises in prices throughout the financial crisis. For example: house prices in Canada have risen 27.6% compared to a 19.16% decline in the American market over the last 5 years.
Already we are seeing our cash strapped lenders making it more difficult to borrow money, and when they do lend they are imposing stringent terms. For example; many lenders have significantly reduced how long they will lend for. Often they want you to pay your mortgage off by age 65, even though paradoxically we are told we have to work longer with the state retirement age predicted to reach age 70. Lenders have already started to restrict how much they will lend for consolidation purposes with regard to remortgaging, but as yet lenders collectively have not gone as far as the Canadian government.
However, given the Canadian’s recent record in regulating the housing market it is possible that the UK government may want our lenders to follow their lead. Although it must be acknowledged that any changes will certainly bring short term pain to some home owners who have over committed but cannot remortgage or, add extra payments typically for the first time buyer who may have borrowed for over 30 years in the past. But it does never the less have long term advantages, these are, firstly the obvious of paying off the mortgage earlier and also building up equity in your property quicker. This could prove decisive when moving house as it allows you to put a bigger deposit on your next property and it may give you a better mortgage rate. This bigger deposit could be the difference between affording the new property, or staying put in a smaller, cramped or overall unsuitable property. Also by restricting remortgaging it sends out a strong message of fiscal responsibility to the borrower that will hopefully help them in the future.
I have noticed more recently that lenders have started to contact people who have interest only mortgages and are asking them how they intend paying off their loans. If you don’t have a repayment vehicle they can demand their money back at say age 60 when the mortgage term comes to an end. So it could make good sense to tackle the problem now, and finding out if your lender will allow you to convert to a repayment mortgage and extend the term. If they agree you will need to find out how long they will extend it for and if it is affordable for you. If not, it is worth seeking advice to see who will give you a longer extension to make the deal work for you. The same message applies if you are thinking of remortgaging, particularly for capital raising. It is worth striking while the iron is hot than be suddenly locked out of the market like some Canadians are through a legislation change.
Many competitors have described the issues surrounding interest only mortgages as a ‘ticking time bomb’ but I believe that with a bit of forward planning the bomb can be defused.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages. Contact us on (01524) 832057, via e-mail info@kieronbassett.com or visit www.kieronbassett.com.
Kieron Bassett DipPFS
25th June 2012
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