Irony of the Mortgage Rule Change…

Matt Chan • August 16, 2012

In June, our Finance Minister, Jim Flaherty, tightened up mortgage rules in Canada to help moderate home purchase spending.  As a quick recap, the new rule changes include:

1) Maximum amortization on insured mortgages has been reduced from 30 years to 25 years

2) Maximum Loan to Value on mortgage refinances is reduced from 85% to 80%

3) Home purchases over $1 million will no longer be eligible for mortgage insurance

I am sure Mr. Flaherty has good intentions when setting these new guidelines.  He is quoted as saying: “It’s a question of trying to moderate behaviour and I hope Canadians will reflect before they jump into a market at the high end,”

There have been numerous articles about increasing debt levels of Canadians:

The irony of the mortgage rule change is that the new refinance rule (ability to refinance only up to 80% reduced from 85%) now restricts and hurts one’s ability to consolidate consumer debt in a refinance.  Here is an example to illustrate my point:

Couple owns a home worth $500,000

Mortgage balance is currently at the 80% threshold of $400,000 (80% LTV)

Couple have $50,000 in credit card debt at an average rate of 15 to 20%.

Under the old rules, couple could have refinanced the mortgage to 85% LTV ($425,000) to help consolidate the credit card debt to reduce the cost of their mortgage debt and to reduce the monthly cashflow to carry the debt.  In fact, under the previous rules, one could refinanced up to 90% which would have been up to $450,000 in our example and thus consolidate the entire debt load.

My point is this: If our government is serious about helping Canadians be more responsible with our consumer debt, then why not address consumer debt.  Why are we restricting homeowners with the ability to consolidate debt with a secured loan against an asset that is generally appreciating (our home!) with minimal interest rate?  Meanwhile, major credit companies are getting away with exorbitant interest rates!

The irony is that it is easy for someone to rack up consumer debt with minimal paperwork yet it is getting more and more challenging to apply for a mortgage.  How hard was it the last time you increased your credit limit on your credit card or when you applied for that car loan/lease? – I am willing to guarantee that it was much much easier than applying for a mortgage.  Consumer debt is one of biggest culprits of our debt crisis here.  Consumer debt is oftentimes the result of impulsive purchases – that shopping spree, that deal on that vehicle you always wanted, etc…  When one realizes that they can no longer afford the financing payments, one then seeks out a refinance.  Unlike a spurn of the moment decision to purchase on credit, a refinance is not an impulsive decision.

Mr. Carney needs to wake up and do something about consumer debt and really leave the mortgage rules alone.

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