Mortgage brokers say tightening rules on unsecured consumer debt, not mortgage lending rules is the answer to lowering household debt
January 17, 2011 (Vancouver) – Finance Minister Flaherty’s announcement this morning of tighter mortgage rules continues to emphasize mortgage debt as the culprit for record levels of household debt. However, these changes affect high ratio mortgages only, a very small part of the mortgage market. The real issue says the Mortgage Brokers Association of BC (MBABC) is growing consumer lines of credit, consumer loans, car leases and credit cards, and the unsecured lending practices of these lenders, not what homeowners are doing with secured mortgage debt. The new rules will primarily affect new and younger homebuyers, a demographic which does not typically shoulder high consumer debt.
Mortgage lending is not creating the problem of record levels of household debt, consumer debt is, according to the MBABC. By the time consumers need to refinance their mortgage, consumer debt already exists. A mortgage refinance can often be a solution to a homeowner’s debt issue, and these new changes reduce the effectiveness of this solution. It does not, however, resolve the main issue of consumer debt, which started the problem to begin with.
“Household debt loads are directly related to these unsecured debt factors, not mortgage lending”, says MBABC President Joanne Vickery. “Further tightening of mortgage rules is not necessarily the right answer. Consumers need to have the discipline to change their financial habits and to not take on debt that they cannot afford.”
“Consolidating household debt and rolling it into a mortgage is a smart option for an initial solution”, says Vickery “provided that any savings are then used to pay down the mortgage or invested into a retirement savings vehicle. Consumers cannot, however, continue to use their home as an ATM; they must change their habits on acquiring consumer debt.”
Vickery advises homeowners and those looking to buy a home to contact a qualified MBABC mortgage broker for assistance with determining home affordability as well as long-term debt planning and debt management.
Ottawa acts to slow down borrowing on homes, limit consumer loans
17/01/2011 2:40:00 PM
Julian Beltrame, The Canadian Press
OTTAWA - The federal government is making home ownership more difficult for Canadians on the margins of affordability, and moved to cut off some types of borrowing.
The new measures were necessary, Finance Minister Jim Flaherty said Monday, because a minority of Canadians are "borrowing to the max."
It is the third time in three years that the finance minister has acted to restrain credit at a time of historically low interest rates.
The new rules reduce the amortization period to 30 years from 35, reducing the amount Canadians can borrow on their first home.
The measure, which comes into effect on March 18, will increase the monthly payment on a $300,000 mortgage at four per cent by $105, according to the government.
As well, Ottawa has lowered the limit on how much money Canadians can borrow using their homes as equity to 85 per cent of the value from 90.
And the government will no longer insure lines of credit secured on homes as if they were mortgages.
The minister made clear there is not a debt crisis in Canada at the moment, even though household debt has reached a record 148 per cent of disposable income, a higher rate than currently exists in the United States.
But he said he was concerned that some Canadians were getting stretched and would feel the pinch when interest rates rise.
"We are responding to a situation that could develop," he told a news conference, "and we want to avoid that.
"It's obvious we could have gone farther. We have not touched down-payment requirements, for example. This is intentional. We are trying to strike the right balance so that we do not create any sort of shock in the market, or any sort of dramatic pressure in the market."
Ironically, the measures open room for Bank of Canada governor Mark Carney to keep interest rates low for a longer period, given that the threat of runaway borrowing has been lessened.
The central bank next pronounces on interest rates Tuesday, but most analysts expect Carney to keep the policy rate at one per cent until at least late spring.
CIBC's chief economist, Avery Shenfeld, said the impact overall on mortgage lending will be "marginal."
"It's the difference between somebody borrowing $200,000 and $180,000 or 190,000," he said.
"More dramatic would have been to raise the down payment, which would have a larger impact on people's ability to finance their first home."
The Bank of Montreal's Douglas Porter said the measures are the equivalent of raising interest rates by about half a percentage point, but more targeted.
"This is way a way of not affecting a lot of innocent bystanders, including the manufacturing and the tourism sector, by putting more upward pressure on the Canadian dollar," he explained.
Flaherty said he moved on home-equity loans and lines of credit because some were not using the money to build equity on their residences, but on consumer spending.
"They are used to buy boats and cars and big-screen TVs, and that's not the business mortgage insurance was designed for," he said.
"Our measures will help improve the financial situation of households in Canada," he added.
The tighter rules had been well flagged by both the federal government and the Bank of Canada, which have for months beat the drums on the risks of growing consumer debt.
In a speech earlier in the month, the bank's deputy governor, Agathe Cote, noted home-equity loans as a share of overall household credit had risen by 170 per cent in the last decade.
The central bank has expressed concern that as Canadians pile on debt, not only do they expose themselves to coming higher interest rates or economic shocks, but they will no longer have sufficient disposable income to spend on other items, thereby potentially damaging the economy.
"If there were a sudden weakening in the Canadian housing sector, it could have sizable spillover effects on other areas of the economy, such as consumption," Cote said.
With 27 years of direct mortgage lending experience, first with a major bank, then a local credit union and now as a Mortgage Broker, I have arranged mortgages on almost every type of property imaginable....even a 50+ ft fishing trawler!!