After further analysis I believe the just announced mortgage rule changes punish responsible, and especially first time, homebuyers. I am specifically referring to the reduction in maximum amortization from 35 to 30 years.
Over the last several months, the Federal Government and the Bank of Canada have been giving “hints” that they were concerned that Canadian debt loads were getting to high. These “hints” came in light tones to start and became louder. This was widely reported by the media. So I knew they were going to do something about it. It would be whether by raising interest rates or by regulation changes.
So it came as no surprise that mortgage rule changes would be coming. The possibilities of these were widely speculated on over the last several weeks.
But is this the correct move?
I do not believe so.
The concern has been that Canadians debt loads are way too high. And if interest rates rise they will not be able to afford the debt payments. I will not dispute this. However, is it really a matter of them taking out too large a loan for a home?
Let me explain my reasoning.
Whether the amortization is 35 or 30 years, if rates rise, payments will rise! When a person’s mortgage comes up for renewal, if the rates are higher, PAYMENT’S WILL RISE REGARDLESS OF AMORTIZATION.
If the goal is to protect people from higher rate exposure in the future, I believe this is a “FAIL”.
Now some will argue that with the lower amortization people’s ability will be limited. They will borrow “less”. Sure they will borrow less but at the same payment!
$300,000 @ 4% compounded semi-annually, 35 year amortization results in a payment of $1322.40 per month.
Most buyers will buy to their maximum, especially first timers. I can tell them that they can’t do a 35 year amortization anymore so they can’t get $300,000. They would then just ask what they qualify for at 30 years. Well…based on standard calculations, assuming they could qualify for a payment of $1322.40 per month previously, they would then qualify for $278,097 as a mortgage.
They would then just go and find something suitable with that.
So if rates rose in the future, how does it make a difference on exposure to risk whether they are 30 or 35 years? Payments all goes up!
If the worry is about future affordability what is the difference?
Payments will be same to start, and rise with the potentially higher rates (albeit a bit less with the lower amortization), but they will have less borrowing power.
My question is why “other debts” instruments are not regulated? Based on my experience, people get into trouble a lot more with credit cards, personal loans, etc. Rates are higher, payments are higher, and extremely easy to get. In the case of credit cards it seems I get an offer in the mail every week.
To qualify for a mortgage, the offer does not come in the mail and “pre-approved”. The criteria were stringent enough. You actually have to QUALIFY based on income, credit and debt load.
The lowering of the amortization, I believe, forces some people out of the market. Or forces people to buy something they don’t want. Or in a neighbourhood they don’t want.
It really punishes the responsible people, the first time homebuyer and sadly the lower clients at the end of the income scale.
Your comments are welcome. What do you think? Agree or not?
