Introduction
March 19th is the day the federal government presents its last budget of its current mandate. Since this budget is leading up to October election and will be a core of Liberal’s platform, it has to have some goodies or incentives for voters to re-elect Liberals. Even last night a CBC journalist was speculating that the budget will be taking into account access to high-speed internet in both rural and urban areas (offsetting the current divide), financial help to Canadians to improve and upgrade skills to stay competitive in the job market, and also help millennials and other middle-income families to purchase a home in today’s highly volatile, competitive, and almost inaccessible housing market.

The question is what sort of incentives or help our Finance Minister, Mr. Bill Morneau, can provide? This note looks at this issue.

Possible Venues
Essentially, the following are some key tools he can tinker with:
1. Reduce minimum down payment;
2. Increase amortization period to pay off mortgage;
3. Adjust the eligibility criteria;
4. Increase amount that an owner can borrow from his/her RRSPs and pay back over a period longer than the current ten years after owning a home;
5. Financial subsidy or incentive (I don’t think he can place any threshold on interest rates charged on mortgages as that would be considered as intervening in capital markets; he may, however, drop the current so-called “financial stress test” that looks at owner’s ability to pay off mortgage if it went up by 2% from the current rate).

Some of these tools have been used in the past and the result or public reaction has not been that positive.

For those who still remember the times when conservatives led by Mr. Harper with his ever pleasant Finance Minister, Mr. Jim Flaherty, tried to boost the housing market in a sagging economy. At one point, Mr. Flaherty allowed potential home buyers to buy a home with no down payment. And many hungry buyers rushed to own a home, but unfortunately, had no or little means to maintain it or keep it for too long. There was a public outcry that the government was pushing people to more financial hardship by allowing them to move into a home with no down payment – home they can’t afford to maintain. The Finance Minister listened and back-tracked to 5% minimum down-payment.

Then he tinkered with amortization period, increasing it from the conventional twenty-five to forty years. Again there was an outcry that with amortization that long, people would not only be paying a lot of interest to banks and other financial institutions issuing mortgages, but also have no time to save any anything over their work life for say children’s higher education, or personal retirement – assuming forty years is a standard work-span (or, from 25 to 65). So there was another re-tracking; we moved back, first to 35 years, then 30 years, and finally to 25 years – the conventional amortization period.

Since Mr. Morneau is likely aware of these tinkerings that one of his former counterparts tried to help potential home buyers, and in turn, boost the economy, I don’t think he is going to change the minimum down payment; he may change the amortization period to thirty years as people are now living and working longer, even past their seventies.

As far as adjusting the eligibility criteria – mortgage debt plus property tax plus heating cost shouldn’t exceed 30% of buyer’s net household income – set by our Crown agency, the Canadian Mortgage and Housing Corporation (CMHC) may be changed as mortgage amounts have been sky rocketing relative to incomes of households. It can be raised to 35 – 40%. During the seventies and early eighties, a typical homeowner’s mortgage amount taken was around three times its household income compared to eight to ten times today (as the rising home prices have pushed up the demand for mortgage amounts. No wonder, home ownership is slipping away from the reaches of many young and middle-income households. And those who are living and maintaining high mortgage homes are likely financing their day-to-day needs by using consumer credit including credit cards and secured and unsecured lines of credit. It’s a double debt whammy – young and mid-income home owners are overloaded with debt. Under these conditions, many may not pay back the money they borrowed from their own RRSPs over ten years. Here again, Mr. Morneau can help these families by extending the pay-back period.

One possible Band-aid
There is one way the federal Finance Minister can help mid-income home owners or those aspiring to buy a home. Make annual interest paid on mortgage on primary residence as non-refundable tax credit – like we do on many other annual expenditures including student loans used to upgrade skills, or use of public transport to reduce pollution and protect environment, and on and on. What’s wrong with the cost of owning a home – it’s not only the key asset of Canadians, but also its acquisition helps the domestic economy. On such annual expenses, tax payers get 15% credit at federal level and some portion at provincial level (for instance, it’s 5.5% for those living in the province of Ontario). Considering that nearly two-thirds of all households live in an owned home, and roughly six out of ten such households own a mortgage, I can understand the high cost to taxpayers over the years. To that effect, we can make this credit either ‘income dependent’ (like CMHC doesn’t provide mortgage insurance on a home worth one million dollars or more) or set some maximum limit on mortgage interest paid – either way, we are financially helping those who need help, and that’s what our tax system is all about – not only to reduce the income inequality, but also to help those who need help. Look at GST tax credits, children’s benefits, and other social assistance programs – all designed to help the needy.

Let me illustrate by an example. Say, a home owner in Ontario has a mortgage debt of $400,000; considering he/she has a closed 5-year mortgage at 5% interest (to be amortized over 25 years), he pays $21,326.85 as interest in first year, $20,896.52 in second year, and so on. Using 15% of tax credit at federal level and 5.5% at provincial, he/she will be entitled to credits of $3,199.03 and $1,172.98 respectively in the first year, $3,134.48 and $1,149.31 in the second year, and so on (showing that as interest slides down over the years, so would credits). So a homeowner gets financial help worth $4,372.01 in first year, $ 4,283.79 in second year, and so on. These are small amounts and are affordable at both levels of governments; on the other hand, these amounts can help a cash-hungry homeowner.

In my opinion, allowing annual mortgage interest paid on principle residence as a tax credit is a win-win situation for homeowners and federal and provincial governments. Some may argue that it’s not fair for those owners with no mortgage or for those not owning a home. Indeed they have a point about fairness. But the kind of tax system we currently have, there is hardly any tax credit that’s universally applicable to all taxpayers.

I rest my case.

Tags Mortgage debt, consumer debt, household finance, home-ownership, home as asset, federal/provincial government, housing, tax credit, tax system