July 25, 2008, 6:00 am

Is Common Sense coming back, or is it Just Fear Growing Stronger?

by: The Financial Blogger    Category: Banks and You,Personal Finance
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Previously in July, the Canadian Government decided to restrict the mortgage environment by shrinking the maximum amortization period to 35 years instead of those huge 40 years mortgage term. Then, they imposed minimum cash down of 5% compared to the $0 cash down offer we used to have for a few years. Some people might say it’s bad news since these measures will surely add more pressure on economic brakes.

Well I am part of people who think that a little bit of common sense will certainly not hurt our economy. By looking at what is going on in the States, I can only applaud what was done up north. We would be pretty stupid to not try to learn from our neighbour’s mistake! We are certainly not smarter but at least, this time, we have a chance to avoid the catastrophe.

The government is trying in every way to keep the inflation down while not increasing our interest rates. If interest rates go up in a near future, this will obviously slows down our economy but probably create more bankruptcies as well. In addition to that, we would get a stronger dollar which would contribute to reduce our exportations. Since Canada is a country where most of its economy is based on resources and exportations of them, we would be in a bad shape!

By restricting the mortgage industry, the government will create a chain of good events for the population:

#1 People will be forced to save in order to buy a property which will temporarily help increasing the amount of liquidity on the market.

#2 They are more likely to revised their budget in order to fit bigger mortgage payments. Chances are that they will think twice before buying a property.

#3 Bank will become more reluctant to “B class” lender as the lending industry is slowing down.

#4 We are decreasing the chances of having couple buying properties they can’t afford since they will have to take time to save money (therefore develop good habits and the ability to master a budget).

In fact, the best thing would probably be to go back to 30 years with 7 or 8% minimum cash down for a few years. This would result into a drastic measure but will surely take people away from wasting their money and going back to common sense. My biggest fear is to see 40 year mortgages and 0% cash down offer coming back right after the recession in order to “help people buying a property”. If it’s the case, those actions would have been based on fear and not on common sense. Let’s hope that there are some people with good thinking in our Government! 😉

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