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Cars and Credit: Better Way to Address Debt?

18 September 2012

Finance Minister Jim Flaherty made some serious changes to mortgage rules that went into effect on July 9. The biggest change was the one made to mortgage insurance, limiting amortizations on these mortgages to just 25 years instead of 30. The government also reduced home refinancing to 80 per cent of a home’s value instead of 85; and they’ve also fixed the maximum gross debt service ratio at 39 per cent, instead of 44. But of all the changes, it’s the one to insured mortgages that has caused the most squawking in Canada. And some, including Stu Niebergall, strongly disagree with it.

Stu Niebergall is the executive director of the Regina & Region Home Builders’ Association. He says that the new rules are far too much “blanket” protection; and that the federal government should have made moves to target specific borrowers, not the country as a whole.

He says,

“The reduction of the amortization period impacts all first-time home buyers who require mortgage insurance the same way – even the ones who have low levels of debt and good credit. This is a blunt mortgage change that penalizes good borrowers and first-time home buyers. Reducing the maximum amortization period of 30 to 25 years really puts everybody in the same basket. While there is a need to recognize and decrease the high levels of household debt, the federal government should have used more precise tools that would be related directly to individual home buyers.”

And Mr. Niebergall thinks that increasing the level of credit scores would be one way to do that.

“Further limiting debt ratios or raising minimum credit scores at the mortgage application level might have been a more prudent approach. That would impact individuals, instead of having an effect on all Canadians.”

But what Mr. Niebergall seems to be forgetting is that the mortgage rules weren’t put in place solely to stem household debt (although that will undoubtedly be a nice side effect for Mr. Flaherty.) They were also put in place to reduce the amount of stress placed on CMHC, the Crown organization that insures mortgages and is getting close to hitting their ceiling.

But all in all, raising credit scores might be a good idea. It’s certainly better than the next one Mr. Niebergall had, which was to focus on the amount of car loans currently being taken out by Canadians.

He also says,

“I’m not sure how valid it is to pinpoint the housing industry as the tool to slow the economy nationwide. Mortgage debt is asset-backed debt. It’s different than other types of debt, like a vehicle loan.”

To go along with this, he pointed to the fact that a car loan in Canada typically has a life of about 7 years; despite the fact that any car will greatly depreciate over this time.

But there are a few problems with this line of thinking. The first is that housing markets are used to determine the economy of just about any country, and it’s a good tool to use as it shows how many people are borrowing and able to manage their debt. Housing prices are also a good measure of where we sit economically, and where we’re headed. Homes cost a lot. And therefore, they make up a huge part of our economy. The average vehicle (even a huge one) doesn’t cost even close to the amount of an average home and so, looking at the number of cars purchased may not yield the same effect as looking at home sales.

Secondly, how is putting the spotlight on vehicle loans going to help slow home sales and ever-increasing home prices? Because that’s mostly what Mr. Flaherty was trying to do with these rules. Sure they might keep some of the market for now. But that only means that sellers will have fewer interested parties, and they might have to lower the asking price on their home.

And for the time being, that’s all Mr. Flaherty is asking for.

What do you think? Were the new mortgage rules a good move on the government’s part? Or were there better ways to go about it? Let us know what you think by commenting below, or checking out our Facebook page where we put new and interesting stories up every day!

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