With the global economic outlook improving somewhat, the focus has been put on the problems facing Canadians locally. The most prominent being the growing consumer debt levels. Over the past 2 years we have seen new restrictions implemented in the mortgage market, like the maximum 30 year amortization on insured mortgages, and qualifying at a higher rate for anything less than a 5-year fixed term. These new restrictions were thought to be proactive actions by our regulators in order to try and discourage personal debts levels from growing exponentially, and to guide Canadians towards responsible borrowing habits.
With the first quarter of 2012 coming to an end, economists & regulators will be scrutinizing what effects these restrictions have actually had on the average Canadian borrower.
With rates still at all-time lows, it is very appealing right now to refinance your home in order to pay off some consumer debts that are at much higher interest rates. And that solution definitely puts some homeowners in a better financial position by reducing their personal debt or even eliminating it completely. Just because it is paid off, most lenders do not require you to close the account, meaning you are able to easily accrue that debt again. This is the concern facing our Canadian regulators and they ask how can they help Canadian consumers reduce their debt level?
I’ll be honest in saying I think further restrictions such as reducing the maximum amortization to 25 years will have more of an immediate effect on our mortgage market than a 1% rate increase would over the next year. When rates go up (and they will), they tend not to have as large of an impact on qualifying ratios as a lower amortization restriction would. When borrowers chose to take a variable or short term mortgage we have already seen a new qualifying rate implemented in order to confirm those borrowers can still afford their payments if rates were to jump. The next step in trying to reduce consumer debt levels will likely be a rate increase AND more restrictions! I know it’s not the best news, but it’s kind of obvious that rates will have to increase at some point or another, so that is pretty unavoidable. Whereas, the restrictions have a more measurable effect on the Canadian mortgage market and allows our regulators to ensure we are on the right track to keeping Canada the #1 banking system in the world.