Home Affordability and Mortgage Debt: Finding the Balance

The Issue

Many Canadians want to buy a house. This is often the single largest expenditure of their lives and, in order to help them become homeowners sooner, the federal government and financial institutions have developed programs and products aimed at making access to mortgage credit easier.

For example, in 1992 the federal government established the Home Buyers’ Plan (HBP) which allows Canadian consumers to withdraw money from their Registered Retirement Savings Plan (RRSP) for use as a down payment.

The Canada Mortgage and Housing Corporation (CMHC), a Crown Corporation, has also facilitated access to mortgage loan insurance. In particular, it has reduced the amount required as a down payment, it has extended amortization periods and it has offered mortgage loan insurance to self-employed workers and immigrants who lack a credit history in Canada.

For their part, financial institutions (FIs) have developed new mortgage products, such as mortgages with cash rebates and mortgage lines of credit. These also facilitate access to mortgage credit.

These changes have made it easier to purchase property. On the other hand, this improvement has been accompanied by a significant increase in Canadians’ indebtedness, which makes them vulnerable to unforeseen events such as loss of employment or an interest rate increase, etc.

In a report published in February 2010, the Vanier Institute of the Family stated that the median price of houses in October- November 2009 was about $340,000 or about five times the after-tax income of Canadian households. It also pointed out that the number of mortgages held by chartered banks and in arrears of 90 days or more in October 2009 had increased by over 50% compared to a year earlier.

Moreover, the problem with information sources for consumers is that there are too many of them. In addition, the information differs from one source to another and is not always adequately disseminated. Consumers could plan their purchase better if there were one recognized and reliable source of information and if that information were available in a number of forms.

Managing the Problem

The Minister of Finance recently announced measures to alter the eligibility rules for government-guaranteed mortgage loans. These measures seek to prevent consumers who underestimate their long-term capacity to repay a loan from becoming overly indebted.

Recommendations

Nonetheless, the members of the Canadian Consumer Initiative request stakeholders to consider the following issues and recommend that:

1. The amortization ratios which CMHC and financial institutions use to calculate consumers’ maximum debt load be revised downwards. Experience has shown us that consumers underestimate the financial obligations involved when buying a property (renovations, heating bills, condominium fees, insurance, taxes, etc.).
2. The initial down payment required to qualify for mortgage loan insurance must necessarily come from the borrower’s proven savings and that financial institutions be prohibited from providing it, for example, through a mortgage loan with a cash rebate.
3. The CMHC and Financial Consumer Agency of Canada (FCAC) be given the task of collaborating with consumer organizations to examine the information available to consumers on home purchase and the various possible channels for distributing such information. These bodies should also be given the mandate to distribute the information widely in a variety of formats, to equip home-buying consumers appropriately.
4. Financial institutions be required to provide all would-be mortgage borrowers with an information kit recommended by the CMHC, including a budget forecast worksheet and that the financial institutions be required to ask consumers to complete this worksheet, to help them to do so and to include it on the customer’s mortgage file.