Is Canada Making Mortgage Borrowing Tougher?
With the latest recession in recent memory, which followed a real estate bubble that burst after being pricked by one too many subprime mortgages, Canada is about to make mortgage borrowing stricter than ever.
If you remember, the economic crisis was brought on by banks that lent too much money too many times to people who couldn’t afford to repay the debts. This happened in the US, but to a certain extent, it also happened in Canada. Institutions whose business it is to buy these debts from banks began to collapse because they could not recover the debts, and that started a freefall for every other business as individuals and companies went bankrupt one after another.
The Canadian government is rightly worried about a repeat of this. Canadian banks are still in a lending mode. They are not turning down too many borrowers at present. However, it is becoming increasingly suspect whether it is ok to lend to all borrowers with variable-rate mortgages. It is necessary to evaluate mortgage borrowers, feel Canadian regulators, before lending to them. It is quite possible that interest rates may rise in the near future, and evaluation is required to see if variable rates mortgage borrowers will be able to handle increased interest rates.
This development comes on the back of Finance Minister Jim Flaherty’s declaration that an US-like housing bubble has not happened in Canada, nor, he says, is it about to happen. Various regulators, and even bank execs, apparently don’t believe this all that much. They have been known to urge the Finance Ministry to revise how banks lend to borrowers at a time when the market seems to be expanding, with many borrowers taking advantage of the low interest rates to buy property on mortgages. It may become difficult for these borrowers to service their loans once the interests rise, as it is bound to happen sooner or later.
For the ordinary borrower, this may just mean more paperwork, more proof of financial standing, and longer periods of review by lending agencies. However, for those with relatively poor credit ratings, and relative lack of financial substance, stricter lending rules may mean no loans at all. This is the time to take stock of your financial situation, pay up old debts (parking tickets?) and generally become organized, if you are planning to borrow in the future.
That said – it also needs to be mentioned that any such regulatory measure is going to be good for the economy in the long run. Genuine borrowers with enough personal worth will still get loans, even if after a little longer wait, but borrowers who can possibly default will be weeded out. That means there will not be another wholesale default on loans, as it happened in the US, and there will not be another economic collapse. Yes, ultimately, that will be good for everybody. Nobody wants to have another recession, even if that’s means paying some old parking tickets or small credit card debts to get a new loan.
