30 Year Mortgages For First-Time Home-buyers?
Tuesday Feb 19th, 2019
Canadian government is considering extending the maximum amortization on insured mortgages. Amortization is the length of time a borrower agrees to pay off their loan. Insured mortgages are limited now to a “only” 25-year term, meaning their home will be paid off in 25 years.
However, The Home Builders Association, having being not happy with recent sales numbers, claims that could change very soon. Canada is considering allowing first-time buyers the ability to amortize for 30 years. This move should improve housing affordability, but does it, actually? It depends.
Canadian's fondness for extended amortizations is one that's both costing and saving them a truckload of money.
A 30-year amortization reduces mortgage payment about 12 per cent. But it also costs home owners over 20 per cent more interest over the life of a mortgage, assuming they don't make prepayments, but who does make them anyway?
Surely, regulators don't like this long-amortization trend. It increases risk to the system, they argue, because people accumulate equity slower. Equity is a crucial buffer if times get tough and a homeowner needs to refinance or draw funds for retirement. But who gives about regulators? It's all about the house. YOUR house.
Since the 2000, average GTA home prices have had only one down year, according to the Teranet-National Bank House Price Index. They're up 69-85 per cent in the last decade alone.
Meanwhile, average weekly earnings have risen just 23 per cent in that same 10-year time frame. How people pay their mortgages? Homebuyers whose earnings haven't kept pace with home prices have little choice but to take longer amortizations if they want to board the housing train.
Many, many buyers used to take longer mortgage (once, up to 40-years amortization on their mortgage with some lenders) for several reasons, one of them the fear of being priced out of the market if they wait to afford mortgage at 25 years, or,in most cases, just driven by desire to buy houses they could not really afford but wanted them anyway. Because a 30-year amortization lets buyers purchase about 10 per cent more home than a traditional 25-year amortization.
As a result, that increased buying power boost, in part, has provided major support to massive price appreciation that leads so many into longer amortizations to begin with. Talk about adding gasoline to fire. It surely just a beginning, in time, more regulations will follow and more lenders could roll out even longer amortizations (hello again 40 years mortgage) to help buyers to load more debt.