Government Changes to Mortgage Lending Rules Negatively Affecting Canadians

By: Gary Parkinson on October 19, 2012

In July of this year Finance Minister Jim Flaherty announced new mortgage lending rules, specifically tightening up Canadian bank lending practices and lowering the maximum amortization period of mortgages from 30 years down to 25 years. This was done in reaction to continuing reports of record household debt across Canada, which now has been revealed to exceed 160 percent of disposable income.Lauded at the time as being necessary to help prevent the debt balloon from bursting, especially in areas related to housing and mortgage financing, some experts now suggest the new mortgage rules are not having the desired effect.

Another reason the changes were implemented was to prevent foreign investors from buying up property in order to sell it at higher, unaffordable prices.  But according to Syndicate Mortgages Inc. CEO Markus Arkan, the new policies are harming Canadian residents rather than foreign investors, limiting citizens’ chances of upgrading their living conditions and improving their credit ratings.  The government believes the changes to the mortgage rules will leave at least 5 percent of potential homebuyers unable to meet the new requirements. 

With no other option left, they either acquire unsecured credit at interest rates ranging from 10 percent to 18 percent, consequently damaging their credit ratings or they would be forced to lease a home for a certain period of time until they regain sufficient financial stability to buy a house.”

Arkan suggests there will be a trickle-down effect from these changes that will severely hamper both the housing market and the whole Canadian economy.  With home prices over-inflated especially in Toronto and Vancouver, market demand is already coming down along with the need for new homes.  Without that need for construction, jobs will be lost, the economy will struggle again, and without economic growth there will be little if any opportunity for getting massive household debts paid down.

Arkan believes that the government must research how their intervention in the market will affect Canadians first before foreign investors.  The Bank of Canada has signaled household debt as the number one domestic threat to Canada’s economic growth and policies that will only make that threat worse is the last thing the country needs in these difficult times.