Earth Hour

Tonight, we are urged to shut off our lights for one hour between 8:30 and 9:30 pm, in honour of Earth Hour.  This event is organized by the World Wide Fund for Nature (WWF), and is held to increase awareness on global climate change.  Earth Hour was created to:

• To unite people and show our desire to protect the planet.

• To encourage and empower people to take action beyond the hour itself

• Create an interconnected global community and build on the momentum and

action for a sustainable future

I think we all know the damage we do to our planet, and this hour represents the unity that can be formed to fight against it.  So, I think we should all participate in the one hour of darkness - even the CN Tower is doing it!

Is it too late for the Department of Finance to get their foot out of their mouth?

The mortgage world is preparing for battle today, as rates continue to drop to record lows.  The banks expected a war with each other, but not with the Department of Finance.  Manulife Bank of Canada made and aggressive move and dropped their 5 year fixed rate to 2.89%, only to have it stopped after a phone call from Jim Flaherty.

Our Finance Minister is trying to put a halt to 'aggressive' and 'irresponsible' lending, and is concerned at Canadians' rising levels of debt.  However, mortgage insiders find it funny that the low rates were prompted by him in the first place, in attempts to keep the housing market from overheating.  He implemented some changes to the lending rules, which was a smart move on his behalf.  He successfully filtered out buyers from those who should, and those who could.  By tightening the rules, it was more difficult for buyers to qualify, which was his way of ensuring that people were not overspending, and that buyers were able to financially handle the burdens of having a mortgage.

Last year, when major banks aggressively dropped their rates, we found ourselves in the midst of a mortgage war - everyone was trying to offer the lower rates.  The war was between the major banks, and oligopolized against independent mortgage brokers.  At the time, lenders in the broker channel were unable to compete with what the bigger banks were doing.  Now that the low rates have been offered for a while, the broker channel was able to offer the same rates.  However, the Finance Minister can make calls to major banks like Manulife, but he cannot sit and call each independent mortgage broker with the same warnings.

Mortgage brokers felt the wrath last year, and are increasing the levels of competition.  A mortgage broker that I have worked with is currently offering a 2.79% 5 year fixed rate.  Mortgage brokers are sometimes allowed to waive portions of their commission in order to provide a lower rate - in other words, they buy down the rate.  This is what they have to do in order to compete with the large banks, after last year's dominance.

On many levels, this kind of competition is not only expected, but it's healthy.  As a Realtor, I want my clients to get the best deal, and the best product.  I don't worry about my clients overspending, or taking on burdens that they can't financially handle.  I'm very familiar with the lending process and criteria, and I am confident that it ensures people are in the right financial state to carry a mortgage.  I think the Department of Finance is micro managing by making calls like this, and I think that the professionals know what they are doing, and moreover, the Canadian buyers know what they're doing.

The Ambiguity With Canadian Household Debt

The average measure of household debt was just published, and - as usual - it has caused quite a stir.  Canada has hit a record high of 151%.  This means, that for every $1.00 we make, we owe $1.51 on.  Debt is considered to be your credit cards, loans, mortgage, etc....Sounds scary, right?  Well, it shouldn't be.  An incredible 58% of Canadians have credit scores of over 700, with only 15% having scores lower than 600.  This tells us that Canadians have enough money to pay and maintain their debtors.

The methodology behind the 151% is ambiguous, and an inaccurate display of the state of the Canadian household.  What this figure does not account for is the lifespan of the debt.  Let's go back to 7th grade math.  Let's use an example of an annual income of $100,000 with debt of $151,000.  The calculation would be: 151,000 ÷ 100,000 = 1.51.  However, because we know that the income is based on 1 year, the equation should truly look like this: 151,000/? ÷ 100,000/1 = ?.

Considering that this figure includes your mortgage, let's take this in simple terms.  The average mortgage has a 30 year amortization (they calculate your monthly payments based on the entire amount spread over 30 years).  For simplicity sake, let's say your entire debt is a mortgage for $151,000.  So, using the same example, the true calculation should look like this:  151,000/30 ÷ 100,000/1 = 5033.33 ÷ 100,000 = 0.05.  So, theoretically, the average measure of household debt should truly be 5%.

My example of course, is ambiguous because I'm making a lot of assumptions - it's difficult to take an accurate measure of Canadian's debt, and the time they have left on their respective terms.  There are, however, way more effective ways to gauge what the true number should be.

When you apply for a mortgage, car lease, line of credit, etc... creditors look at your Total Debt Servicing Ratio (TDSR).  For mortgages, if you have a credit score of 680 or more, creditors require for your TDSR to be at a maximum of 44%.  What this means, is that they will gladly finance you if your mortgage and debts equals to less than 44% of your income.  This is looked at based on monthly payments.

Essentially, the most accurate way to measure the average household debt would be getting an average Canadian TDSR - what you pay, versus what you make based on the same time frame.