Canadians were borrowing trouble and needed to be saved from themselves.
That’s the story on the tighter mortgage rules (to be) introduced by Ottawa on Thursday. Ignore the complaints from people who make their living through the buying and selling of houses. They’re not primarily interested in whether people are making sound financial decisions in buying into the overheated housing market in some cities.
The federal government is keenly interested, and for good reason. Although today’s buyers are meeting banks’ borrowing standards, many are taking on excessive debt.
Both Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have talked a lot about the risk that rising interest rates will make current debt loads unmanageable for some. They should be so lucky as to have interest rates rise. That would require a turnaround in the global economy, and right now, the big worry is a new recession.
Rising rates are a longer-term worry, then. In the near term, there’s the problem of people taking on mortgages that demand too much of their financial resources. Sure, they can cover off their regular mortgage payments. But what about saving for retirement or their kids’ university or college education? And what about their ability to withstand a financial shock like a job loss?
The government has decided to thin the herd of buyers by lowering the maximum amortization period to 25 years from 30 for people who require mortgage insurance because of a small down payment. This means higher monthly or biweekly mortgage payments, which will keep marginal buyers on the sidelines until they either save more or make more. Most first-time buyers go with an amortization of 30 years today. Moving to 25 years isn’t draconian – that was the unquestioned standard for the decades that preceded the increased amortization periods introduced several years ago.
The government is also putting limits on mortgage refinancings by capping borrowing at 80 per cent of a property’s value, down from 85 per cent. The government could have been tougher here. Enthusiastic use of refinancings has contributed to high levels of indebtedness.
Don’t be angry with Ottawa for making it tougher to get into the housing market. You’ll get your mortgage paid off sooner with a 25-year amortization and, if you can no longer afford to buy, you’ve been saved from borrowing trouble.
Rob Carrick and business reporter Richard Blackwell took questions about the mortgage changes. Mobile users can read the discussion here.