The Government of Canada is doing its best to again erase all personal accountability when it comes to Canadians and the issue of personal finance vis a vis the new mortgage lending practices. According to an article in Edmonton Journal. Canadians currently owe $1.48 for every dollar of their disposable income. This is troubling for the government so it has two options: 1) raise Bank of Canada interest rates making debt cost more, and increase short term mortgage rates, or 2) tighten mortgage lending rules, which they have now chosen to do for the third time since 2008.
Effective March 18, 2011 the maximum amortization period will be reduced from 35 to 30 years for government-backed mortgages with loan-to-value ratios greater than 80 per cent. As well, the maximum for which Canadians will be able to refinance their mortgage will drop from 90% to 85% of the value of their homes. This is similar to the changes made last year, which made borrowers meet the standards for five-year interest rates and lowered maximum mortgage refinancing from 95% to 90% of home value. As well, government made a requirement that revenue properties must have a 20% down payment for government-backed mortgage insurance on rental or investment properties not lived in by the owner. Before all of this, in 2008, 40-year amortization periods were reduced to 35 years and interest-only loans were eliminated with a new 5% down payment minimum.
It has been said that Real Estate is the basis of all wealth. Canada has been lauded for its strong banking system which has saved Canadians from fates similar to those of our neighbours to the South, at least to some degree. The challenge that Canadians face? Not only does the government change the rules every few years, it also restricts choice in the market place, which ultimately hurts the average Canadian. For example, if you started with a 40 year amortized mortgage on a property with a three year term in 2008, as a consumer you will be hooked in with that lender for the duration, because a 37 year amortization is no longer available on the free market. This lack of competition forces consumers to stay with the same lender, eliminating the opportunity to shop for the best rate when the current term expires. This leaves them stuck with few options until they catch up to what ever the current mortgage rules are at the time.
Why does the Government of Canada see Real Estate as such a threat? We did not see restrictive limits put on the stock market when many Canadians lost a significant part of their savings due to the bursting of the technology bubble. The amount that people can invest in their RRSPs has not been reduced. My point is that investing in anything is a risk and reward proposition. You could lose money investing in the stock market the same as you could in the real estate market. The only difference is that you can live in a home but you can’t live in stocks.
The efforts the government is making to save some of us from ourselves hurt the rest of us who know and willingly accept the risks of real estate, both as homeowners and investors. For example, Small Business is a key contributor to the Canadian economy that is responsible for job growth and will be affected by these new rules when it comes to refinancing. Many small businesses rely on refinancing or credit that is available through a home equity loan in order to finance their business. The Small Business sector will now have to consider other options for funding which may involve less competitive financing options from the banks as they put a squeeze on small business, retarding their growth and the growth of the economy.
Canadians need a chance to be able to use their assets wisely. Certainly I am not advocating that Canadians use their home as a cash machine to go on vacation or buy a new car. An important financial concept Canadians need to understand is not to go into debt for consumer purchases using their home or their retirement savings as equity. The value of the home could drop, and it might not be possible to fund living expenses upon retirement.
If the Government of Canada continues to change the mortgage rules it will bring more volatility to the housing market and reduce competitiveness within the mortgage market. Both factors have the ability to hurt the Canadian consumer in the end. Investors (which really is any homeowner) should be able to play by well-established rules and grow their wealth without having the goal posts changed on a regular basis.