Wednesday, 19 January 2011

So Will the Mortgage Rule Changes Help Consumers?

Minister Flaherty announced the following changes to Canada's home financing rules. Maximum term of 30 years (down from 35), and home owners can only borrow up to 85% of the value of the home (down from 90%) .  The justification is to rein in consumer debt.  The irony is that it was this very same Conservative government that allowed the 40(!) year mortgage in 2006, and have been slowly back-tracking ever since.

Will this help? Well, Yes and No.

It will curb the excesses that have created the "house rich everything else poor" segment of our population.  There are families that are over-burdened by mortgages they should not have taken in the first place.  Limiting how much can be borrowed is a step in the right direction.

But what concerns me is how many total debt we can take on.  A friend of mine is what I would consider an extreme example, but may be more common than I think.  They have one mortgage, 3 lines of credit, 2 car payments, credit cards and who know how many "buy now pay later" loans from stores.

I honestly do not know how they do it.

But this is, in my opinion, what gets us into trouble.  You get a mortgage, and maybe you borrow a bit more than you should, but you don't truly realize that until the second kid is born after after you are three years in on payments on a 25 year loan.  You have a growing family which is more expensive than 3 years ago and you start dipping into the credit cards.  You need a larger vehicle, and get a car loan for the minivan earlier than planned.  The house starts needing repairs, and you get a line of credit.  The furniture is getting old and is starting to fall apart and you get new furniture through a pay later loan promotion.  Next thing you know your minimum monthly payments to all your loans is a large portion of your income (or all of it) and you feel more stretched than ever.

The biggest problem with loans is that they are easier to acquire and devilishly hard to pay off.  Life goes on and it does not wait for you to pay down your loans.  Shit happens.  You can't use a car with a busted transmission, and you can't live in a house with a leaky roof or a broken furnace.  And that's just dealing with maintaining what you already have.

The problem with living under a heavy debt load is that you get tired just paying it off.  You're tired of patching broken equipment, or just making do.  You want to be able to buy that shiny new TV, that xBox 360 or that vacation to Mexico.  And so off to the bank you go....

So while limiting mortgage terms may help, I wouldn't be surprised if the overall debt situation for Canadians doesn't improve.  Money that isn't borrowed through a mortgage will be borrowed through a line of credit, or through a car payment.

So maybe, instead of talking about limiting mortgage ratios, we should start talking about limiting total debt ratios.  The bank will come calling if you default on your debts regardless of whether you have a 20 year or a 40 year mortgage.

5 comments:

Marc Bernard said...

No wonder there are so many bankruptcy consulting ads on the radio these days.

Catelli said...

Bingo!

Ken Breadner said...

You've touched on this before, Catelli. I agreed with you then, and I agree with you now. There are many reasons families take on debt. Some are even legitimate. Speaking as somebody who used to scatter money to the four winds, I'm as debt-phobic as they come now, and even the comparatively little debt we've got I feel is a burden. Add in yearly cost of living--which always seems to go up at triple the rate of inflation or more--and it doesn''t take much to get well and truly screwed.

Catelli said...

I am a bit of a broken record, aren't I?

But yeah, the cost of living is slowly increasing, especially in those vital areas of food and energy. We all feel the vise, but can anything be done about it? (well yes, something "can" be done) Or will anything be done about it?

Given the way other countries have dissolved into mobs, riots and mayhem I am going with "no".

Ken Breadner said...

Oh, skip away. The Breadbin's motto should be "writing the same five blogs since 2004".
You've gotta love how Harper is trying to make himself look responsible for fixing a problem he created.
What *will* be done--I think--is a careful, blindfolded tightrope walk between raising interest rates and curbing inflation wherever possible. Expect some shocks when they get the balance wrong.