Consumer Debt Problem
The Canadian Government has intercepted to try and help consumers stay out of debt by making mortgage rules difficult. It currently allows refinances to 80% of the appraised property value. This was done to keep consumers from accessing their home equity and using it as an ATM machine.
The Stress test was introduced to protect consumers from getting into more house than they can afford. We need rules to help protect the economy which makes sense.
What doesn’t make sense is how they view and issue unsecured debt. You can have an appointment with a bank, tell them how much income you make, what assets you have and they will turn around and offer a large unsecured debt by only providing your photo ID. Literally no proof of income or assets.
If this was a mortgage application, you would have to prove your employment income via a letter of employment, pay stubs, and 2 years of T4’s. Your assets would have to been proven via 90 days account history. Getting a mortgage is far more difficult than it is getting unsecured debt.
Why is this even allowed? Consumer debt is not an investment. Mortgage rules get tighter and tighter every year, yet it has never been easier to get a credit card, line of credit, or auto loan.
Consumers are restricted in how much they can buy which is actually an investment yet given access to unsecured debt so easily.
I recently just received a letter from my bank on an unsecured personal line of credit I have. It has always been prime rate plus 4.5% however this letter was to inform me they were increasing the rate to prime plus 7.5%. That is a 3% increase. Which is pretty hefty. I love how they gave an example that if your outstanding balance was $1,000 the increase in cost was only $2.55. What amazes me is most people have at least a $20,000 line of credit. This increase costs consumers an extra $51.00 per month.
I thought the best part was the statement, “To accept these changes, simply continue to use your Line of Credit. I don’t understand why there are so many rules regarding mortgages and owning a home, yet nothing is done to control the banks from increasing credit cards and lines of credit. During these tough economic times of layoffs, hours being cut back, and yet they turn around and increase the rates on unsecured debt, the same unsecured debt consumers are accessing because of the tough times.
We need a change and it’s time our Government seriously takes a look at this and makes some changes.