A move by two lenders to change their calculations on debt servicing ratios vis a vis unsecured lines of credit is raising broker eyebrows.
“It is extremely frustrating that instead of going after changes made to how easy it is to obtain unsecured debt that it keeps getting harder to apply for a mortgage,” says Jason Friesen, with Premiere Mortgage Centre. “Financing a mortgage is becoming harder and harder and if this change in policy is widespread it will impact borrowing significantly.”
Both Street Capital
and First National recently changed their lending guidelines to include using 3 per cent of the balance of a credit card or line of credit in calculating a client’s debt servicing ratios. That represents a change from using just the interest-only payment to determine monthly debt levels. They are now also making clients use a payment in their qualifying ratios for secured lines of credit, even if the line of credit is at zero balance.
“The implications of this change in underwriting could be huge if it catches on with all lenders,” says Friesen. “I feel using 3 per cent of the balance on unsecured lines of credit and loans is a very smart thing to do, if you are barely qualifying at today's historically low rates and based on using the interest only payments on your debts then you likely should not be taking out the mortgage you are applying for. What concerns me is that using a payment on any secured line of credit based on the limit but not the balance will have a serious impact on people.”
Friesen uses the example of someone who has a $500,000 line of credit.
“In their monthly liability this would be over $1,900 as a monthly payment from what the lenders are doing,” he told MortgageBrokerNews.ca. “Take for example a parent who wants to help co-sign for a child. The parent has paid their own $500,000 mortgage off, but have a $500,000 line of credit remaining. Even though they have no intention of using the line of credit, they can't help their child qualify because of the payment that the bank must use.”
Finance Minister Jim Flaherty
has issued several statements on his concerns of rising personal debt levels among Canadians and how it is adversely affecting the economy, while showing his pleasure that last year’s tightening of the mortgage regulations are having their effect in cooling what was an overheated housing market.