Husband told me the news today as we were dancing around each other in the tiny U-shaped working space in our kitchen (he grinding and brewing his coffee, me putting the kettle on for tea): Canada’s Department of Finance has announced an end to the 40 year mortgage and zero-down financing. As of October 15 the most damage you can do to yourself will be 5% down and 35 years amortization.
It happens less than a month since I last mentioned how dangerous I felt these lending products to be. We are a generation of consumers raised to be more or less financially illiterate, and what this results in is people becoming slaves to their debt. Simple Living is about freeing up one’s time for the truly important things in life, and a major component of this is spending the money you have wisely. Money spent on repaying consumer debt is almost always a drain on one’s time and freedom, not to mention emotional energy.
But surely real estate is the exception right? Well, it’s true that real estate is probably one of the safest long-term investments you can make. We all need a roof over our heads and paying into a mortgage is one way of storing equity for the future. But home-buying is no less susceptible to the forces of marketing and consumerism than any other product and, like with many other large purchases in life, people seem to easily get convinced to buy more house than they need or can afford. I believe this happens because of our aforementioned lack of basic financial skills and because the people we turn to for advice are the very ones who profit from maximizing our debt loads.
The last person to be telling you how much mortgage you can afford is the bank. When forty year mortgages became available the PR surrounding it was along these lines: “Making it more affordable to buy a home in today’s real estate markets”. They acted like they were doing US a favour. Forty years of debt and the accompanying massive interest payments is no favour to anybody except the institution to whom you pay interest. This type of lending is, IMHO, nothing short of predatory.
What CAN you afford? A payment that doesn’t stretch your budget already, so that you can weather changes in interest rates, income, and circumstance. An amortization term whereby you have a real chance of paying off your mortgage before you are dead. A debt ratio (downpayment versus loan) that doesn’t put you at risk of an upside-down mortgage should the markets turn (and they always do). And for goodness sakes, unless it’s a matter of life and death, do NOT borrow money on your home. It isn’t “real” money in the sense that you have it in the bank. It’s a virtual savings account that can disappear with the whims of the market; unfortunately the same cannot be said for your payments when you draw on that virtual account. This kind of debt is no different than any other form of consumer debt except that you have placed your home on the line.
In Simple Living terms, debt robs us of the freedom to make our life priorities a reality. Freedom to stay home with your children, to move should circumstances warrant it, to grow your own food and preserve your harvest, to create healthy homemade meals from whole foods, to be mindful in all that you do. Freedom to travel, to learn new skills, to pursue hobbies and interests, to volunteer in your community and participate in worthwhile projects. Freedom to spend more time doing what you love and less time doing what you must. I don’t think our society has really grasped this concept, and I’m under no illusion that the government had this in mind when they made this announcement. Nevertheless I think this is ultimately a good thing for Canadians.