Just this morning we posted on this blog about how we as Canadians have lowered our debt levels. But, the fact that we’re still spending $0.50 more on every dollar that we have is enough to keep Queen’s University finance professor, Louis Gagnon, concerned. And he thinks that further tightening of the mortgage rules is needed to keep Canadians from biting off more than they can chew.
Gagnon’s concern is that people who simply can’t afford mortgages see the low interest rates, think they’re a great deal, and run out and find a lender who will give them one. But when those interest rates rise, homeowners who came into the game with very little to offer will be the ones that feel the huge pinch the most. “I think the key is equity,” he says. “When those interest rates go up, those people who have a low level of equity in their homes will have that equity wiped out.” This isn’t only true then, for those that go into a mortgage that they can’t afford, but also homeowners that take on too much debt in the form of home equity loans, as this group has also dipped into, and depleted some, of their equity. But it’s the initial mortgages that Gagnon thinks Canada needs to focus on, and tightening the rules once again would make it more difficult for people who are most at risk for entering a situation their budget just can’t afford.
Gagnon thinks that the amortization period in Canada should be lowered from 30 years to 25; and that the down payment requirements should also be changed from 5% to 10%. Typically, a 20% down payment is usually needed, although these low percentages that Gagnon is speaking of are available for those that qualify. However, today those who have only a 10% down payment still need to go through CMHC or private mortgage insurance in order to be approved for a home loan.
What Mr. Gagnon is most worried about is that Canadians are going to be so enticed by the interest rates (and the hugely discounted mortgages being offered by nearly all of Canada’s major banks,) and that they’re going to become overly optimistic. That optimism, he thinks, can also lead to Canadians thinking that if they don’t embark on home ownership now, it’s simply going to be too late. But if they jump too early, he says, it could lead to a disaster near that of the housing crisis in the United States, or the one that Canada saw in 1989. Gagnon says, “It would be a classic case of everyone dropping their asset at the same time just to make ends meet.”
