High Debt to Income Ratio for Canadians Leads to New Mortgage Rules
By Kristin Gordan Woolard
The overwhelming 145 % consumer debt to income ratio in Canada has led The Minister of Finance, Jim Flaherty, to announce three new changes to mortgage rules. However, I feel the recent changes have completely missed the mark of their intention.
The changes come into force on March 18th, 2011 and will reduce the maximum amortization from the existing 35 years down to 30 years. As well, the maximum amount that a consumer can refinance their home will be 85% of the value as opposed to the current 90%.
The final change is that there is that as of April 18th, 2011, there is no option for a Home Equity Line of Credit past the 80% of value level.
The change to secured lines of credit, in my opinion, will have little impact. While the mortgage insurers, such as CMHC, offered an insurance product on secured credit lines, there were very few lenders who offered such a product. The other two changes, however, are cause for concern.
A reduction in maximum allowable amortization for mortgages means that homebuyers now have to qualify based on a higher payment – about $35 for every $100,000 in mortgage amount. That’s almost $160 per month for a purchase of $450,000 – a low price for a home in the greater Vancouver area. Combine that with last year’s regulation that Canadians have to qualify on the Bank of Canada five-year benchmark rate (currently 5.19% for variable mortgages and any term shorter than five years) and Canadians’ options are extremely limited.
One of the driving factors to our country’s housing market recovery is the first-time homebuyer. With the new 30-year maximum amortization, many young Canadians will be out of luck as they won’t be able to meet the debt-to-income ratio policies of the lenders. Thank goodness the minimum down payment requirement was not increased from 5% to 10% down at the same time as rumours were circulating! At least we dodged a bullet there.
Another aspect of qualification that would have affected first-time homebuyers drastically did not come to fruition. Currently, only 50% of a monthly condominium maintenance fee is required to be included in the debt-servicing ratio. It has been thought that it may be increased to 100% of the monthly condo fee, but that was not announced with the current changes.
And so we come to the issue that is causing me the most confusion – the reduction of the maximum level for refinance from 90% down to 85%. If consumer debt is the problem, how is reducing the amount of equity Canadians can tap into to pay out high-interest consumer debt possibly going to help? Turning consumer debt into a lower interest, lower payment obligation through refinancing and eliminating credit payments is wise given the near historical low mortgage rates still being offered. And seeing that Canadian mortgage default is among the lowest in the world, shouldn’t we be encouraging the switch from unsecured credit debt to secured mortgages where we have a proven responsibility?
I shudder to think that many people could be forced to sell their family home if it becomes necessary due to unforeseen circumstances to use the equity they have built up in their home now that refinancing is restricted to 85%.
Discussion in the office this morning also touched on what the effect that having fewer qualified buyers due to the recent changes will have on the housing market, let alone the Canadian economy. Fewer buyers qualifying, fewer homes sold, housing surpluses in the market, devaluation of home prices to try and encourage sales, a stoppage of new home construction, loss of jobs… and so on.
Jim Murphy, President of the Canadian Association of Mortgage Professionals, commented that while he understands what Jim Flaherty did he hopes the government shows the same willingness to change if the market cools further.
“We understand why he did what he did,” Murphy said. “But we hope when the time comes, he’ll revisit that decision. Real estate is very important to the economy, and it’s crucial that we find a balance because you don’t want to overreact to temporary market conditions.”
I’m sure I’m not alone in hoping that no further changes to mortgage legislation are on their way. And don’t even get me started about a study in 2008 where Sharpe, Arsenault and Harrison found that the median real earnings of Canadians barely increased between 1980 and 2005, and that over the same period, labour productivity had risen by 37.4%.
If you think about this, profits are up 37.4% percent and our wages are pretty much the same as 1980 so reign in our personal debt? Read more…
MEDIAN WAGES AND PRODUCTIVITY GROWTH IN CANADA AND THE UNITED STATES
http://www.csls.ca/notes/Note2009-2.pdf
Kristin has been in the mortgage finance industry for 11 years and independently licensed since 2002. She currently works for Dominion Lending Centres. Her highly approachable manner and professionalism make the mortgage experience seamless and stress-free for her clients. For information, you can contact Kristin at www.kristinwoolard.ca
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