Canadians are discovering the necessity of  being an informed consumer of  financial products. There have been many recent news articles outlining the importance of managing consumer debt, as interest rates are at an historical low.  Now we have the recent tightening of Mortgage guidelines .The new rules reduce maximum amortizations to 30 years from 35 years for government backed insured loans over 80%  . In addition, when refinancing homes, the maximum amount a consumer can borrow has been reduced to 85% vs. the previous 90%.  These changes will come into effect on March 18th.  Finally, the government insurance will be withdrawn from Home Equity Line of Credit products. These changes will come into effect on April 18th.   The underlying  concern is, can consumers weather an increase in interest rates, not  “if” it happens, but when it happens.  Bank of Canada Governor Mark Carney cautioned that  “low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning” in his speech to the Economic Club of Canada on Dec. 13, 2010.
And so, where are the debt levels for Canadians, and why is it a problem?
According to the Dec.13th, 2010  study on Household  Debt,  Statistics Canada reports that the ratio of “household credit market debt to personal income” increased to 148.1%.  It’s a ratio  “Household credit market debt/  Personal Income”     therefore either the debt part or the income part is causing the concern. So which one is causing the fuss?  The answer is both variables are changing.   While consumer debt has been growing quickly and has been subject to much dialogue since the 1990’s  , the Stats Can 3rd quarter report indicated that personal disposable income had declined by 1.5%.What this means is that many hard working Canadians have experienced a lower disposable income, but may be a little too tempted to take on more debt given the very low interest rates available.
So if feels you need to do  more on less income, your inclination is probably right.
What kind of debt is being taken on that is a problem? Well that depends. According to the CGA 2010 report “Where is the Money Now?”….household debt is comprised of two parts: consumer loans and mortgage loans.  According to the same report, economists historically classified mortgages as “good” debt, because it was attached  to real property, and assisted in building wealth for the average household. Consumer loans were considered “bad” debt, as this type of debt was unsecured, or secured by depreciating assets. The “good” and “bad” scale appears to have shifted to a question of building equity, versus mounting personal debt in any form.  We have two definitive actions that have occurred, the recent tightening of Mortgage rules, and changes to disclosure regulations for Credit Card lenders in September 2009.
The consumer credit card disclosure changes are fully listed in the News release Sept.1,2010 at www.fin.gc.ca “Regulations Come Into Force to Protect Credit Card Users”, and by far and away, the one that caught my eye is the requirement to list the length of time it takes to pay out the balance using the minimum payment. Minimum credit card payments are typically quite a bit longer than the new 30 year amortizations prescribed for insured government mortgages.
We have Jim Flaherty on  Dec. 23rd, stating that “this is the year for no”, and then on January 17th tightening mortgage guidelines for government insured product.  However the tightened lending rules today are still more flexible than the guidelines 15 years ago when an insured mortgage was required with less than a 25% downpayment, and maximum amortizations were 25 years.
And yet in every cloud of doom and gloom, there has to be some kind of silver lining. Just maybe, consumers are now requesting, and being given the tools to understand that credit is a consumer commodity, and that we have choice in credit products.  More importantly is the educational process in how we can manage credit choices for ourselves with the right guidance and some basic tools outlining the “real” cost of borrowing.  That being said, a sense of balance and understanding that the long term view needs very much to be weathering an increase in interest rates, and building equity. It seems that despite the change in the financial landscape, the more things change, the more things really stay the same. The very basic principals of making purchase decisions based on value, and spending less than you earn come through all of the headlines and rhetoric. It is the consumer who ultimately carries the weight of all spending decisions, no matter what guidelines the banks or the governments change.

I have given credit to all sources, if for some reason a source was missed, please advise so I can update asap. E&OE.