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T.D. CEO Suggests Mortgage Rules Should Be Stricter

In a report in yesterday’s Globe And Mail, Ed Clark, the chief executive officer of Toronto-Dominion Bank, said the federal government should reduce the amortization of CMHC insured mortgages from 30 years to 25 years.

Apparently, we Canadians need to curtail our spending habits and the best way to fix this problem is for the banks to keep reducing the amortization which simply is the number of years it would take to pay your home off in full. Let’s take a peek at what that might mean for you. Purchasing a home for $360,000 with a 5% downpayment and using a 5 year fixed term rate of 3.39% and a 30 year amortization, the mortgage amount would be $352,089 (CMHC insurance included). The monthly payment would be $1,554.88 (principal and interest only). Assuming annual property taxes of $2,400 and  35% GDS (Gross Debt Servicing  is the total mortgage payment including property taxes and $50 for a heat calculation, divided by your gross income) the income required would be $61,882. Those with an excellent credit rating may be considered using  44% GDS/TDS (Total Debt Servicing is your mortgage payment plus other debts) which would reduce the amount of income required to $49,224.

If the amortization were to be reduced to 25 years and the monthly payment kept the same at $1,554.88, the mortgage amount would be reduced to $315,083 which  is $37,006 less than with a 30 year amortization. That means  you would qualify for a less expensive house if you were under a debt servicing restraint or the income needed to qualify would be higher ($68,142 at 35% GDS and $54,204 at 44% GDS/TDS).

But is this going to solve all our problems of climbing out of debt here in Canada? I think not. Perhaps the big banks should consider the logic of approving folks for a home equity line of credit (HELOC) which has NO amortization at all. You simply pay interest only and these rates are in the range of Prime plus 0.50% to Prime plus 1.0%.  The debt load is most likely never reduced as once you get accustomed to an interest only payment, it is often difficult to discipline yourself to actually pay down any principal on a regular basis. So why don’t the feds start with the HELOC type product instead by at least encouraging (forcing is a bad word) the banks to consider a repayment of HELOC’s. I’m not a big fan of this product simply because a variable rate product is cheaper (currently at Prime) and my clients really do want to see some light at the end of the tunnel as to when their mortgage would be paid off.

Lastly, what about credit card debt? I hear from so many of my clients that their credit card limit has been increased by literally thousands of dollars and how tempting and easy it is to use them. Why don’t the banks start here to reduce our appetite for spending? The big banks should simply stop increasing them WITHOUT the cardholder’s consent.

I truly believe that home ownership is a great thing. Whether it’s a modular home, condo, or a single family dwelling, it’s still the place we take sanction in and call our “home”. I trust the banks will take a hard look before they reduce the amortization any further and look at perhaps all the other “opportunities” within their grasp. Just my opinion. By the way, only 7 more shopping days left until Christmas!!!