Rules Rules Rules

Howdy friends

I read this morning that the Canadian government is again starting to consider tweaking mortgage rules.

http://www.canadianrealestatemagazine.ca/news/item/1384-imf-warning-rattles-flippers

This is being considered in order to protect the Canadian economy from the increasing debt toll the average individual Canadian is carrying. I have agreed with most of the measures that have been implemented to secure our housing market, and continue to agree that something must be done to address the potential financial crisis that would be inevitable if people fail to change their spending/saving habits, I also don't believe that mortgages are where our greatest vulnerability lies.

I would like to suggest that it is not secured debt that has us veering towards a cliff of economic uncertainty but rather our unsecured financing options that will finish us if we are not careful. 

Currently the requirement to gain a mortgage far exceeds any requirements to get a Visa, Mastercard or other unsecured debt and the consideration of ability to repay seems almost non existent. Giving credit to students and others with no income seems fairly risky to me Yet it continues to occur as increasing debt load is the ultimate goal of these companies. Its how they improve their own bottom line.

A mortgage secured to a house (there is something remaining in case of default)  is required to have its minimum payments set based on a 25 year amortization why would we ever allow unsecured debt (borrowed with no security) to be given without any regard for the time required to be repaid. The tweak to the system that I would propose is that minimum payments be regulated so that instead of having minimum balances set to be paid into perpetuity that they would have a maximum of 10 - 15 years. Credit cards should never be used to finance a purchase but especially if you cant afford to repay what you are borrowing within a reasonable amount of time.

In the past few years it has become a requirement for credit companies to advise their clients of how long it would take to repay. I recently heard of one persons repayment time at the minimum requirement would take him 126 years to pay off what he owes on that card. 126 years... really? How is that ever going to benefit our economy and what happens when these people die with this balance? How is it that we have not recognized that this is an incredibly dangerous situation to put our selves in. 

The numbers: (courtesy creditcards.com)

A $20,000 credit card balance with a 2% minimum payment will take 78 years to pay at the minimum balance and the interest paid will be $95,210.

That same $20,000 at 4% minimum payment is done in 15 years with interest paid of $14,030. 

Yes it will be more limiting as to what that person can purchase in the short term but provides tremendous relief in the long term saving that person over $80,000.  It doesn't take a degree in accounting or finance to see which is better for the person and for us as an economy over the long term.

Just my thoughts. I would love to hear yours.

Till next time plan to prosper!

David Whitrow
Royal Lepage Regina Realty and Trademark Homes
dwhitrow@gmail.com

@whitrow on twitter and instagram

Comments

  1. Excellent points David - thanks for sharing. As a mortgage broker I agree, I have seen over 2000 credit bureaus in the last 5 years and there is certainly a divide between people who manage their credit well and people who abuse it. It is a slippery slope. I agree completely that our focus should be towards making it harder to get unsecured credit.

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