Monday, March 21, 2011

What effect will the mortgage rule changes have on the property market in Canada?

Tougher mortgage rules starting today are getting a failing grade by mortgage industry professionals who say the federal government effectively dropped the ball in a half-hearted attempt to deal with rising consumer debt.

If Ottawa were genuinely interested in tackling high amounts of personal debt, it needs to address other means of high-interest loans such as credit cards, personal loans and lines of credit, they say.

“We need more legislation on access to other types of loans,” says Claire Drage, a mortgage agent with Dominion Lending Centres Home Capital Solutions Inc. in Oakville, Ont.

“Do you really need a Chase card? Capital One? Visa and Mastercard? Sears? Bay card? There’s so much easy access to high interest consumer debt.”

As for how the mortgage changes will affect the housing industry, Drage suspects it will be business as usual for the most part.

“The demand will still be there,” she says. “Consumers might have to cut their choices a bit. It’s like going to an arcade and winning coupons and instead of getting to choose prizes from the bottom three shelves, now you get to choose from the bottom two.”

In January, federal finance minister Jim Flaherty announced he would shorten the maximum amortization on Canadian mortgages to 30 years from 35 years, and lower the refinancing limit from 90 per cent of a home’s value to 85 per cent. The government also announced it would withdraw insurance on home equity lines of credit.

The move came after reports about the rising debt load of Canadians. Statistics showed household debt in Canada surpassed the U.S. for the first time in 12 years. Statistics Canada reported the average Canadian debt-to-income ration hit a record 148.1 per cent.

Kristian Harris, a mortgage broker with in Toronto believes the government’s mortgage changes will have little impact.

“The government’s purpose of making these changes is to slow down the housing market,” Harris says. “They’re worried about consumer household debt. I think this is a sign the government doesn’t think interest rates will rise substantially over the next 12 to 18 months so they felt the need to implement these new rules. If the government thought rates were going to increase significantly, they wouldn’t need to make these changes.”

Although many focus on the mortgage market when it comes to consumer debt, they should also look at the easy access available to many Canadians for other types of credit, he says, adding that the government should eliminate giving credit cards out to students and distributing Visa card applications at hockey games.

Furthermore, Harris doesn’t think the changes are going to impact the industry or the real estate market all that much. The reduction on a mortgage’s amortization period to 30 years will, however, impact some borrowers as to how much they can qualify for. But at about $100 a month on a $300,000 mortgage, the amount is not overly significant.

“It’s only $35 for every $100,00,” he says. “It’s not a huge difference at the end of the day.”

Adam Hawryluk, a mortgage consultant for INVIS Mortgages in Nananimo, B.C., believes the government’s mortgage changes are a step in the right direction. But he would like to see more sweeping changes that also target education and credit regulations addressing the whole spectrum of debt.

Canadians would be better served if they were somehow educated about debt and money issues, he says. In addition, Hawryluk would like to see the government step in to either lower the interest rates that credit card companies are allowed to charge or make access to credit cards more stringent.

“When people are financially extended beyond their means, it’s a scary situation for the whole country,” says Hawryluk. “The mortgage changes are a step in the right direction because we’ve learned from U.S. housing industry.”

The issue of Canadians carrying debts close to or over the edge has been a challenge for many mortgage professionals. Hawryluk recalls an experience with older clients whose monthly debt payments on credit cards and loans climbed to $3,100. The couple had the added burden of being on a fixed income. Fortunately, they had some equity in their home and Hawryluk managed to consolidate their debts in a new mortgage, giving them much-needed breathing space.

“The woman was crying in my office,” he recalls. “They know they’ll never be mortgage free but on a month-to-month basis, they can survive now. They wished they would have come to me years ago.”

Robert McLister, a mortgage professional who writes about the industry for Canadian Mortgage Trends, gives the new mortgage rules a varied critique. Given Canadians’ record debt levels, McLister believes the government had to pull in the reins on borrowing. He’s just not wild about what they decided to focus on.

“The spirit behind it is wise and well intended,” says McLister. “But I think the actual execution of it is poor because it reduces the probability of excess borrowing overall which is great but, at same time, it handicaps highly qualified borrowers that present virtually no default risk for no good reason at all.”

There are many reasons, says McLister, why a borrower might need an additional five per cent on a refinancing. And they don’t have to do with luxury items. He’s referring to being suddenly faced with an illness or a divorce or perhaps having to send your child off to university. The rules also penalize the self-employed person, who might save the extra funds in a mortgage with a 35-year amortization to keep as a back up for their lack of steady income.

“Removing the flexibility from the market in general for people that are extremely low risk makes no economic sense whatsoever,” he adds.

Calgary’s Marty Laframboise, a mortgage broker with VERICO: Mortgage Planning Central, is critical of the changes. He thinks the government should have mandated that if those with strong credit scores wanted to stay on a 35-year amortization, they could do so with biweekly accelerated payments, which would automatically reduce the mortgage term down to 30 years.

“I don’t like the changes,” he said. “They should have been handled differently. It really does take a lot of people out of the price range they’re shopping in.”

Laframboise points to a client who had found a house he liked for $425,000, affordable thanks to the 35-year amortization period. The client had the additional stress that his wife wouldn’t be able to see the house until the end of this month, which means the couple will only be able to afford $395,000 on the new 30-year limit.

“The client is now faced with a situation of having to decide whether to take a leap of faith and hope that his wife will like the house or wait until she comes back and look for something $30,000.00-$35,000.00 cheaper.”

Drage agrees that the country’s overall financial literacy needs a boost. She thinks money, budgeting and debt should be taught to Canadians once they’re in high school. That, she believes, would help prepare post-secondary school students, who are often introduced to credit cards during their college and university days.

Drage has taken some extreme measures with clients struggling to manage their debt loads. She’s taken scissors with her to a client’s home when working on a refinancing application.

“They wanted to swipe and play instead and swipe and pay,” she says.

She’s even advised clients to tear up all but one main credit card. If the client insists on keeping a second card, Drage has advised that the client keep it frozen in ice in an old plastic container in the freezer.

“There’s a way of thinking that it’s easy to get, so it’s easy to spend,” she says. “It’s just a matter of looking at your situation and being realistic. Have a budget and a plan and spend within your means."