A report by a six-person task force recommends that banks take more responsibility for improving Canadians’ ability to manage and repay debt, while also suggesting the federal government introduce more stringent standards for mortgage qualification.
Action Canada’s Task Force on Household Debt, which has been meeting for the past six months, released its report entitled “Debt Crunch: Policy Recommendations for Addressing Canada’s Record Level of Household Debt, which called on the government along with Canada’s banks and financial institutions to implement a Code of Conduct on Lending (CCL) to “promote standards that would decrease borrowers’ financial vulnerability associated with high levels of household debt and ensure they understand the potential risks associated with mortgage and consumer debt.”
Derek Dunfield, from MIT’s Sloan School of Management and a member of the task force, suggested Canada could be in for a reckoning, and argued banks needed to play a more active role in discouraging Canadians not to borrow more than they can afford.
The report referred to the “culture of borrowing” in Canada, which presents two possible problems for the economy. If interest rates rise and housing prices drop, more people could begin to default on their mortgage and credit card payments, Dunfield said.
As well, “an equally worrying – and perhaps more likely scenario – is that interest rates go up a little – and more of people’s disposable income goes to repaying their debt, leading to a significant reduction in consumer spending.”
Since personal spending on consumer goods and services accounts for 58 per cent of Canadian gross domestic product, such a drop could lead to a made-in-Canada recession, Mr. Dunfield said.
The report outlined five key areas the CCL should focus on: matching loan products to repayment plans, using more conservative amortization periods to qualify mortgages, offering loans based on need not affordability, offering higher loan repayment methods as the default option and recognizing financial awareness as a corporate social responsibility.
In its call for more stringent mortgage qualification standards, the report said this could be done “by implementing a higher test interest rate or shorter “qualifying amortization”. The qualifying parameters would be used to determine the maximum mortgage value a consumer could obtain. Should the consumer then chose to amortize over a longer period, they would not be eligible for a larger mortgage. Instead they would be able to reduce their monthly payment by spreading it out over the extended amortization period.”