Say goodbye to the 30-year mortgage

Ottawa is attempting to cool the hot housing market by eliminating the 30-year mortgage and toughening lending rules.



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If you’re young, with no down payment and looking to buy your first home, you may have just missed your opportunity to break into the housing market. Ottawa is closing the door on 30-year amortization periods and restricting the amount of money you can borrow.

The longest government insured mortgage you can get will now top out at 25 years. Ottawa is also limiting how much you can borrow against your home’s value from 85% to 80% and forcing Canadians to pony up a 20% down payment on homes worth $1 million or more. While the latter changes aren’t dramatic, it will limit how much debt Canadians can hold.

This is the federal government’s third attempt to cool the housing market in four years. In 2008 Ottawa lowered the maximum amortization period from 40 to 35 years; in March 2011 it dropped to 30 years.

If you’re one of those grim-faced future homeowners, I feel for you. In 2007 I took out my first mortgage and stretched it out over 35 years. I wouldn’t have been able to get in the market if the rules were stricter. But with housing prices seemingly out of control it was only a matter of time until the government stepped in.

Just look at the numbers: for every dollar we earn we owe $1.50. Housing prices have doubled in the past decade. Plus, The last time federal finance minister Jim Flaherty reduced the amortization period it was because people were “borrowing to the max and borrowing to the max at low interest rates.” But in a press conference Thursday morning, Flaherty says Canadians still haven’t got the message.

“Our government has taken a series of measured steps to protect long-term stability in the housing and mortgage market and to protect Canadian households from getting over extended,” he said. “(The change) will reduce total interest payments and help build up value in homes and (help people) pay off their mortgage debt sooner.”

For those who are worried about the high debt levels and the state of household finances in Canada this change is good news. It means anyone in the market for a mortgage will be forced to take on less debt and make higher monthly payments.

But the news isn’t so great for those who really want to own a home. “For the average guy, this is going to hurt,” says Mark Fidgett, a Vancouver-based mortgage broker. “It’s tough to buy anyway, but now it’ll be tougher.” Still, Ottawa clearly feels that with mortgages as accessible as they’ve been and with homebuyers demonstrating that they are willing to spend anything to buy a house, home ownership is becoming a dangerous game.

While low interest rates have made homeownership accessible to more people, the concern is what will happen when interest rates rise. Consider the following scenario. Say you have a $500,000 mortgage. If that mortgage was charged an interest rate of 3% and had a 30-year amortization period you could service that loan for about $2,100 a month. If you shorten the amortization period to 25 years that same mortgage would cost $250 more. And if interest rates then jumped to a 5%—which is still modest by historical standards—then suddenly your payments will jump to $2,900. In some cases, Canadians could shoulder the higher payments, but they likely wouldn’t be able to afford anything else.

While the new rules won’t affect current homeowners, it could have an impact on sellers. The change likely won’t crash the housing market but it will be a drag on housing prices. “I was seeing a slowing anyway,” says Fidgett. “This is just going to make it slower.”

In the first month after Ottawa cut amortization to 30 years in 2011, home sales activity fell by 4.4%, although the drop was short lived. Still the 30-year amortization was a long period and there was no immediate indication that interest rates were going to climb. While it’s still unclear when rates will rise, Bank of Canada governor Mark Carney repeatedly reminds us that he could raise rates at anytime. That, coupled with this rule change, could very well cause potential buyers to wait on the sidelines until a correction occurs.

Ultimately, the government had to do something. (Whether Flaherty should have raised amortization periods to 40 years in 2006 is another question, one he, not surprisingly, didn’t address in his press conference.) While you can still overextend yourself with a 25-year mortgage, it’s less likely you’ll run into problems because now you’ll need to be in a better financial position to buy a house.

There is a silver lining for those who have put their home-buying plans on hold. If prices do fall—as many predict they will—you won’t need as much cash to purchase your abode. So, if you can be patient, there’s a good chance you’ll get into that dream home after all.

7 comments on “Say goodbye to the 30-year mortgage

  1. Good Riddance! As a retired banker, I can tell you that too many 'unqualified' people were lulled into buying homes that they could not afford. I also have never agreed with Zero down mortgages for the same reason. If you haven't got the discipline of saving a reasonable downpayment, you can be assured these same person will not have saved for emergency repairs, job loss, or other financial crises, that occur to most of us.

    While it is hard to get started in the housing market place as a young person, it is not natural to have instant gratification in every aspect of your life. Many people have to rent their entire lives, but also don't have the same responsibilities for their home in this situation. We are told that we must buy a home to be successful, but in many cases renting is a much more sensible option that allows you to focus your financial resources on other things.

    If you really want/need to buy a house, make sure you have the resources to do so. That what I had to do!


    • I don't really see what the big deal is with the new rules. In fact, we are just back to the way things were in 2003. The housing market needs to to controlled since it's obvious that financial institutions are solely motivated by short-term profits in order to drive up their stock price.

      I absolutely agree with you point of view on zero-down mortgages. If these people can't put together a small down payment, they will be the first victims of interest rate increases that are on the horizon. They could not sustain any financial turbulence so they should not be encouraged.

      Real Estate prices will drop soon enough, so people can use the time to save for a downpayment for when that time comes.


  2. I work in the credit department of a major bank. On a daily basis, I see multiple requests to refinance the home to consolidate personal debts and company's loss. Most of these borrowers who continue to take advantage of the rising home value buy more SUVs, spend more on lifestyles and most want to become self-employed business operators. Most of them don't have a clue about financial statements and business performance. Home equity has been the saving grace. I say 75% fault lies with the customers, while the 25% lies with the branch managers who encourage continued borrowing. Guess the branch managers have to meet their goal targets. Sad, but the house of cards may collapse soon.


    • Sandy, you're so right. This will all come back to haunt everyone invovled. Once mortgage rates start to rise afew percentage points, whenever that is, the other show will drop and these folks that you mention will be drowning in debt that they will not be able to service.


  3. Hats off to Jim Flaherty, our Minister of Finance, he is thinking ahead. There has to be a cap on household debt. In my opinion houses have already dropped $50,000 if you want to sell.


  4. You’re certainly a great writer.Your post provided me with many helpful pieces of information.


  5. Since the start of these new mortgage rules last summer the real estate industry has seen a decline in home purchases for the first time since the recession. And considering how much money the real estate industry funnels directly and indirectly into the economy this may not be the best decision economy-wise.


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