Jim Flaherty says today’s new mortgage regulations—the 2nd major round of changes in 11 months—are meant to “(encourage) hard-working Canadian families to save by investing in their homes and future.”
He says the new regulations are warranted despite the fact that “Most Canadians are quite careful and use common sense in their borrowing…”
That said, there’s no doubt that debt risk has increased. Overall credit levels have climbed faster than income to worrisome proportions. Most agree it was wise for the government to step in and shield the economy from the minority of overborrowers.
Unfortunately, the government performed this debt surgery with a butcher’s knife instead of a scalpel.
That’s because, while reining in higher-risk borrowers, today’s changes simultaneously rip choice away from the majority of highly-qualified home owners. This includes Canadians with excellent credit scores, solid employment, and reasonable debt ratios (i.e. minimal default risks).
The lower amortization limit, for example, reduces the purchasing power by roughly $25,000 for well-qualified homeowners with no debt, a 4% mortgage, and $60,000 in income.
In addition, the lower refinance limit means Canadians with a $300,000 property for example, will now be able to:
Consolidate $15,000 less of their high-interest debt; or,
Borrow $15,000 less for renovations, investing, education or other personal needs
In a release today, CAAMP suggested the government has focused heavily on eliminating mortgage risk that is currently “negligible,” and will be for the foreseeable future.
Jim Murphy, CEO of the Canadian Association of Accredited Mortgage Professionals (CAAMP) says, “We understand why he did what he did…But we hope when the time comes, he’ll revisit that decision.” Murphy says real estate is vital to the economy, “and it’s crucial that we find a balance because you don’t want to overreact to temporary market conditions.”
Canada’s 90-day prime mortgage arrears rate of 0.43% is near an international low.
Murphy says, “Rather than reducing the amortization period to 30 years from 35, as the Minister has announced, we would have preferred that the government had required those people seeking 35 year amortizations to meet the same qualifying standards as those with a shorter amortization. We hope the government will revisit this one feature as the economy strengthens.”
That makes sense given that most recent debt accumulation has been prompted by temporarily low interest rates.
Not everyone is buying boats and big screen TVs with their home equity. Strong, responsible borrowers use longer amortizations to maximize cash flow for legitimate reasons. Qualified self-employed or commissioned salespeople, for example, can see large but normal swings in monthly earnings. 35-year amortizations lower their payments so they can save and weather slow periods. Others rely on extended amortizations to allocate monthly income to better non-debt uses, like investments.
In many ways, these rules are an example of “good intentions” behind bad policy. It’s not surprising that bank executives are quoted in the media applauding these regs. Certain banks will benefit in significant ways, to the detriment of consumers. We’ll touch on that next…