I would like to share a strong opinion I have on a current situation. A few years back, the Government warned the Banks that they were lending money to clients on the never never plan called a line of credit (L/C). I have seen a number of clients over the years who were given a L/C when they purchased their home and 15 years later, their mortgage balance was virtually the same! The government did the correct thing to protect the consumer and told the Banks to curtail this practice.
The Government then announced the stress test in 2017/2018 to protect consumers from rising interest rates, which would have made perfect sense if it only applied to mortgages over, say 80% financing. However the new regulations apply to all mortgages regardless of the equity situation (i.e. $100,000 mortgage on a property worth $1,000,000 is subject to the same criteria). It is generally known within the industry the Banks have so much power and have been instrumental to having these changes approved. Why you ask? Because they want a monopoly on the mortgage market. When a client does not qualify under the stress test, the Banks circumvent the new rules by putting clients into a L/C!! There are a number of lending institutions in our market that are struggling to book new business because of clients not meeting the stress test rules. What is going to happen to these lending institutions, their employees and the healthy competition for the Banks?
How is this helping the consumer? In one sense they say “we want to protect you by making sure you can afford rising interest rates” and then they say “you can’t afford it, so we will let the Bank put you into a L/C with fluctuating rates, higher payments and not require you to pay down the balance of your mortgage”!! Does this make any sense to you? I did a blog in March regarding current practices of the Banks on mortgage renewals. Basically, the new rules prevent a number of consumers from shopping for a better interest rate upon renewal because either they won’t qualify due to not showing enough income or poor credit. The Banks are already taking advantage of this by charging higher interest rates!! http://mortgagesbycolleen.ca/are-you-ready-for-higher-interest-rates-on-renewal/
What does all this mean to the general consumer? Previously, we had what you called ‘common sense lending’ which means if it made sense, people could get a regular mortgage. If you had enough equity in your property or had enough cash to purchase a property, the rate was based on the risk factor. Now, if you don’t pass the stress test and depending on the circumstances, you may have to get a private mortgage at rates as much as 6% higher than what you would have paid!
Here is an article showing and example of how consumers can be turned down for a mortgage but can purchase a $95,000 truck and be approved. Yes, we can still do mortgages but it is costing consumers a heck of a lot more to carry! https://www.mortgagebrokernews.ca/news/why-isnt-the-government-controlling-unsecured-debt-247289.aspx
Hence, my frustration with the Government, the Banks and this whole situation. Why should the general consumer have to pay these higher rates and put them into further debt than they are right now. Why don’t the powers that be work on cutting interest rates on credit cards and unsecured debt? The only ones I see benefiting are the Banks and I would like to know how are they going to fix this? Does anyone have any suggestions?
Colleen Saunders is a 20 year veteran in the mortgage industry, serving Oakville, Burlington, Mississauga and Toronto and offering all mortgage related services such as 1st & 2nd mortgages, private mortgages and more.
To contact Colleen, please fill out the form on www.mortgagesbycolleen.ca or call 416-459-2406