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In previous postings, we outlined the recent changes announced by the Federal Government regarding the rules for government backed insured mortgages. These changes became effective on July 9, 2012. The government brought in these changes because they are very concerned with the amount of debt that Canadians are carrying. In this posting, I would like to provide some insight into what some of these changes mean and how they will affect many of us as Canadians and as homeowners.

In order to qualify for a mortgage, the maximum gross debt service ratio is being set at 39%. In addition, the maximum total debt ratio is being set at 44%. This means that, under the new rules, your mortgage payments cannot exceed 39% of your take home pay and your total debt payments cannot exceed 44% of your net take home pay. The government brought in these changes because they are very concerned with the average debt level of Canadians. At the end of the first quarter of 2012, the debt to disposable income ratio increased to 152%. This means that, on average, for every $1 a person makes, they carry $1.52 of debt.

We think, as a society, that we’ve ducked the horrific financial problems our southern neighbours in the United States have encountered over the past three years. However, Canadians have a lot to be worried about, considering we have one of the highest debt to income ratios of the G20 nations. The ratio is quickly approaching the 160% ratio that pushed U.S. and U.K. households into major financial problems. That debt to income ratio number was also a major contributor to the housing crisis in those two countries.

So what do these changes mean to us all? What impact might they have on our lives over the next decade? Well, these changes are dramatic in nature. They mean that the dream of owning a home will be unattainable for many Canadians, until they get their household debts in order.

In addition, the government has decreed that home purchasers are going to require a minimum 5% down payment in order to qualify for a government-backed insured mortgage. In order to be able to afford to save the 5% down payment, purchasers are going to have to reduce their other debt burdens, especially with the high interest they are paying on credit cards, lines of credit, and other unsecured debts. The best way for many Canadians to afford a downpayment if they are carrying a debt load already, is to file a bankruptcy or a Consumer Proposal.

A Consumer Proposal is a federally legislative option for people to avoid bankruptcy and to drastically reduce their debt. Consumer Proposals allows families to reduce their unsecured debtor, often reducing debt by as much as 80%. The money saved can be put aside towards the downpayment on a house.

Instead of trying to shuffle payments between many creditors, a Consumer Proposal allows you to make one monthly payment to the Administrator. The payments are interest-free. Only federally licensed Insolvency Trustees such as A. Farber & Partners, can offer a Consumer Proposal.

Although it may sound counter-intuitive to say that a bankruptcy is the best way to afford a house, for many Canadians it is the right and the best solution. A bankruptcy will eliminate unsecured debt, including income taxes. The money saved by not paying your creditors can be used to build a nest egg to purchase a house. For many Canadians, the struggle of paying their debts, and the high interest rates charged on credit cards (in many cases over 30%), mean that they will never be able to afford to have enough money as a downpayment to purchase a house. Filing a bankruptcy makes this dream attainable.

At A. Farber & Partners we provide a no-cost, no-obligation review of your situation.We will treat you with care and respect. After that review, we will develop a customized plan to reduce or eliminate your debt.

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