Thanks, Jim Flaherty, we needed that.
It's surprising to find positive reviews from mortgage brokers for the federal Finance Minister's efforts to curb growth in household debt, given that home sales are bound to suffer. But brokers have a close-up view of borrowing patterns and what they've been seeing suggests we do, in fact, have a debt problem that requires action.
Ottawa's three-pronged announcement Monday will effectively eliminate 35-year mortgages for home buyers who need mortgage insurance, lower the maximum amount that people can borrow in refinancing their mortgage and put an onus on lenders to be more careful about which customers get home equity lines of credit.
"It's a tough little set of measures that will pull back the excess availability of credit," said John Cocomile, a broker with GreedyMortgage.com in Toronto. "I think it's fantastic. It's too bad the Americans didn't do this three or four years ago, or the mess they're dealing with wouldn't be nearly as bad."
The Bank of Canada is worried about how indebted Canadians are, big bank executives have spoken up on the subject and now the federal government has shown how concerned it is as well. Borrowers, as Mr. Cocomile tells it, have been oblivious. As a result, they need to be saved from themselves.
At Mr. Cocomile's office, nine of 10 new home buyers have been choosing to pay off their mortgage over 35 years. Starting March 18, 30 years will be the new ceiling for people with down payments of less than 20 per cent.
The extra interest charges resulting from an amortization period of 35 years as compared with 30 years can amount to tens of thousands of dollars. Mr. Cocomile said clients who are informed of this typically say they intend to start paying down their mortgage at the earliest opportunity. Does that actually happen?
"No," Mr. Cocomile said. "I'll follow up with them and say, 'Why don't we ramp up payments?' They say, 'Oh, we have a car loan now, or we spent some money on renovations, or we're trying to get rid of credit card debt.' Credit's so easy - everyone's using it."
Requiring people to pay off their mortgages over a shorter period means they must either pay more per month, or buy a cheaper house. So it's hard not to see home sales suffering as a result of the new measures in pricey cities like Toronto, where David Larock is building up his new mortgage planning business.
"None of these measures will be popular with mortgage brokers and realtors, but Canadian debt levels were climbing to alarmingly high levels," said Mr. Larock, a onetime employee in a big bank's mortgage department. "I don't like it, but for the long-term health of our market I think it's short-term pain for long-term gain."
Mr. Flaherty said his prime concern is that people are borrowing to the maximum at a time of low interest rates. Rising rates will make the debt load less manageable, but people haven't shown any inclination to alter their behaviour in the housing market and in other forms of borrowing.
That's why the government is lowering the maximum people can borrow through a refinancing of their mortgages to 85 per cent of the value of their home, down from 90 per cent. Mr. Cocomile said he's seen strong demand for refinancings from people who have run up other debts and want to consolidate them in their mortgage.
Whereas you can get a five-year mortgage at 3.85 per cent, a typical credit card would charge about 19 per cent. But refinancing to the maximum drastically reduces your home equity and leaves your house vulnerable if you can't keep up with your mortgage when interest rates rise.
Home equity lines of credit have become one of hottest borrowing tools around, but they're getting the lightest treatment from Ottawa. Instead of targeting borrowers directly, the government is putting the onus on banks to lend responsibly. Starting April 18, government-backed insurance will no longer be available to banks to cover losses from customers with lines of credit.
Interest rates on new home equity credit lines could rise as a result, or it could become tougher to qualify for one. Call this another example of how protecting Canadians from themselves comes at a cost that even people who make their living in the housing market think is worthwhile.
"You can totally realize why the Finance Minister is imposing these rules," Mr. Cocomile said. "As interest rates nudge up, people won't be as pressed as they might have been."
Changing Mortgage Rules
Starting March 18, people buying a home with a down payment of less than 20 per cent will be able to take no more than 30 years to repay the loan, down from the current maximum of 35 years. Here are two ways the changes will affect people.
1.) The maximum affordable house price falls
Example: A couple with household income of $120,000 and a 10 per cent down payment.
Maximum house price with a 35-year amortization:
Maximum house price with a 30-year amortization:
2.) Monthly payments rise (but the amount of interest paid over the long term falls)
Example: A $300,000 mortgage at 4 per cent
Monthly payments over 35 years:
Monthly payments over 30 years:
Additional monthly cost:
Total interest savings:
Source: John Cocomile, Department of Finance