Mortgage Broker Supports Crackdown Policies. Meet One Who Doesn’t.

I was reading the Globe website today and saw this article about a mortgage broker in Toronto who thinks that the mortgage changes are a good thing for consumers.

I thought it was quite amusing. It is a great marketing ploy for the mortgage broker referenced in the article. He says something that the newspaper wants to propagate to their readers, they mix up and change around some facts, and he gets some major free publicity. And all he had to do was give the newspaper what they wanted to hear.

“I think it’s fantastic. It’s too bad the Americans didn’t do this three or four years ago, or the mess they’re dealing with wouldn’t be nearly as bad.”

I wonder if this broker even knows what kinds of policies were in place in the US to cause the real estate market there to crash. They were much much more agressive than allowing 90% loan-to-value refinances. One of the ones that I remember offhand was “NINJA” mortgages (no income, no job, no assets). Never in Canada have we had such an agressive policy, and even at their most agressive, the Canadian government was hailed as saviours of the country for keeping their policies conservative. Since then they have tightened up even more significantly.

“The Bank of Canada is worried about how indebted Canadians are, big bank executives have spoken up on the subject and now the federal government has shown how concerned it is as well. Borrowers, as Mr. Cocomile tells it, have been oblivious. As a result, they need to be saved from themselves.”

I never knew that someone who is irresponsible could be saved from themselves. I suppose that forcing someone into bankruptcy sooner by not being able to finance their homes to pay off high interest debt will protect their home equity. Interestingly enough, the government has never said anything about wanting to avoid an increase in personal bankruptcies, so maybe they feel this is in everyone’s best interest.

In my mind, it is very simple. People are buying things they can’t afford, and will continue to do so even if they know they don’t have equity in their homes. In my job, I see it all the time. They don’t buy stuff on credit card thinking “I got my house to back me up.” They buy thinking “Ooh I want that” and then when the debt becomes unmanageable they think “Maybe I can refinance this debt.”

I believe that spending habits is a cultural issue, and it is going to remain regardless of mortgage policies.

“nine of 10 new home buyers have been choosing to pay off their mortgage over 35 years. Starting March 18, 30 years will be the new ceiling for people with down payments of less than 20 per cent.

The extra interest charges resulting from an amortization period of 35 years as compared with 30 years can amount to tens of thousands of dollars.”

Most of my clients go with a 35 year amortization, and I personally encourage it. The reason for this is that it provides financial flexibility and they still have the right to make significant pre-payments without penalty if they can afford to. Pre-payments speed up the amortization process, but in lean times they will want as low of a payment as possible.

“I’ll follow up with them and say, ‘Why don’t we ramp up payments?’ They say, ‘Oh, we have a car loan now, or we spent some money on renovations, or we’re trying to get rid of credit card debt.’ Credit’s so easy – everyone’s using it.”

The interesting thing about this is that, as a mortgage broker, he is not in a position to “ramp up payments.” They have to talk with the lender’s customers support to do that, just the same as me. If I try to ask a client’s lender for something after the mortgage is completed, they refuse to speak with me. I would surmise that while his point may be valid, he is not pushing his clients to speed up their amortization in the follow up.

“Whereas you can get a five-year mortgage at 3.85 per cent, a typical credit card would charge about 19 per cent. But refinancing to the maximum drastically reduces your home equity and leaves your house vulnerable if you can’t keep up with your mortgage when interest rates rise.“

This is deceiving as it is stated. A 5 year FIXED rate mortgage is 3.85%. This means that they are not going to have their payments change for 5 years. A variable rate would be more susceptible to rate fluctuations, but right now you can get that for as low as 2.1%.

The one item I agree with is ending HELOC mortgages on properties at 90% loan-to-value. A revolving credit-style mortgage should require 20% equity. However, very few lenders currently offer HELOC mortgages with less than 20% down anyway.

I think that hindsight will justify what I have written above. If you are looking to refinance your mortgage, I would suggest you contact me as soon as possible. After March 18th, you may no longer be eligible.