Ripple effect of mortgage changes may slow economy

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Ottawa's new mortgage and lending rules are being hailed as crucial to stopping Canadians from drowning in debt, but they come with a downside: slower consumer spending.

Finance Minister Jim Flaherty unveiled measures governing mortgages and home equity lines of credit on Monday, bemoaning the fact that some Canadians are using them to buy "boats and cars and big-screen TVs."

The changes will create the most headaches for cash-strapped first-time homebuyers and those consumers who are increasingly using their homes as ATMs. Still, experts argue this latest crackdown is for Canadians' own good.

While the new rules may initially slow the economy, some say they'll help improve the financial health of households over the long run.

But they will also have ripple effects on many pockets of Canadian business including home builders, real estate agents, renovation industry and retailers.

Homeowners have taken out about $46-billion in equity from their homes, according to the Canadian Association of Accredited Mortgage Professionals.

Mr. Flaherty is concerned that some Canadians are using HELOCs to buy consumer items instead of renovations or building equity in their homes.

"I think that's particularly risky because some of those loans are not used to create housing in Canada," Mr. Flaherty said. "They're used to buy boats and cars and big screen TVs, things like that. And that's not the business that home insurance was designed for, mortgage insurance."

Mr. Flaherty and other policy makers are increasingly worried about the Canadian consumer, who drive two thirds of the country's economic activity. Debt to income levels have now reached U.S. proportions, with Canadians now owing $1.48 for every $1 in disposable income.

A quarter of funds by home equity lines of credit borrowers are used for renovations. The rest is a range of other ways, from vacation to buying cars, daily spending and consolidating debt, according to a FIRM household borrowing survey last year.

Gerald Soloway has witnessed the shift. The head of Home Capital Group Inc., which has about 40,000 mortgages in Canada, says the mortgage-backed lines of credit were originally intended to help people make improvements to their homes. The reality, however, is "it became an ATM for weekend recreation."

It will become a "little more expensive and there may be a little behaviour modification" among consumers seeking such loans, he says.

Credit-counselling agencies -- which have reported a wave of new indebted clients over the past year -- welcome the move, saying it may temper debt levels. But some say the measures don't go far enough.

"Let's take a step further and show people how to get out of debt," said Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada. People must "live within their means."

Monday's move is a "step in the right direction because it means more money in consumers' pockets," said Laurie Campbell, executive director at Credit Canada. However, scores of Canadians have already opted for longer-term amortization periods because they didn't fully realize the extra costs involved -- and that will limit their ability to retire, pay for their children's education or save.

Canada's $44-billion home renovation will be affected, according to Bank of Nova Scotia. The home reno sector now accounts for a record share of the country's GDP -- at 2.8 per cent -- but that could cool. The consequences of a slowing reno market are "far reaching," Scotiabank cautions, ranging from employment to retail stores and manufacturing.

While winter is typically a slow period for residential real estate agents, some buyers may be tempted to move quickly to get ahead of rising interest rates and to qualify for the longer amortization period.

"We had already said that demand would be pulled forward first half of the year by the threat of higher mortgage rates, and this certainly adds fuel to that fire," said Phil Soper, president of Royal LePage.

Any cooling in pricing or accessibility to home equity lines of credit may also dampen consumer spending on big-ticket items, like cars, furniture and plane tickets.

But the cooling off may not be a bad thing if it leads to more stable household finances. Craig Alexander, chief economist at Toronto-Dominion Bank, says he'd already factored in slowing consumer spending -- to about 2.5 per cent this year from about 3.5 per cent this year.

"Going forward, as the Bank of Canada raises rates and with some tightening in mortgage insurance rules, I don't think you're going to see the same degree of strength in consumer spending."

Graydon Hall, 32, of Toronto has access to a $136,000 credit line that is secured again his two-bedroom detached home -- but does not use it.

"I really don't like paying interest... I just don't want to give money away," said Mr. Hall.

But Jakub Abramowicz, a mortgage agent with Mortgage Edge based in Richmond Hill, said clients like Mr. Hall are the norm. "People who have home equity lines of credit are already in a relatively stable financial position where they would not be using it for frivolous things like a TV or a vacation --- most of them."

Others like Nadia, a married mother of three from Amherstburg, Ont., admits her family used both credit cards and two lines of credit to support a lifestyle they could not afford.

The recession pushed their finances over the edge. "We really felt it. There were bills not being paid. There were creditors calling."

The family owes $186,000 on their mortgage and about $48,000 for five credit cards and a line of credit.

They also have a second line of credit that is secured against their home and is full drawn with a $5,000 balance. But Nadia says money is so tight that she can only afford to pay the interest on that loan, about $50 a month, and is not sure when it will be paid off in full.