Canada

Canadian Government Considers Move To Load Households With More Real Estate Debt

The Government of Canada is mulling over how to increase household debt. Seriously. The Ministry of Finance is considering extending the maximum amortization for insured mortgages. The move would lower payments relative to 25 year amortizations, in exchange for paying more interest. The move helps in the short-term, but can cost households a lot more. In addition, it’s also likely to drive prices even higher during the next housing cycle.

30 Year Mortgages For First-Time Homebuyers?

The Federal government is considering extending the maximum amortization schedule on mortgages. Amortization is the length of time a borrower agrees to pay off their loan. Insured mortgages are limited to a 25 year term, meaning their home will be paid off in 25 years. It’s a very long time, but it’s a cap that we’ve become fairly accustomed to in Canada, over the past few decades.

The Home Builders Association claims that could change very soon. Canada is considering allowing first-time buyers the ability to amortize for 30 years. The thought is this increases affordability, but does it actually? Let’s run the numbers to see what they’re talking about.

About The Numbers

Today we’re comparing the cost of different amortizations to a borrower. The home will be a typical Toronto home, which now costs $761,800. We’ll assume the borrower has 10% down (since it’s insured), and borrowing at a rate of 3.59% on a 5 year fixed. We’ll also assume the rate throughout the whole mortgage, which underestimates the cost. We’re currently near an all-time low for interest rates, which means they’re likely to climb. The numbers are for Toronto, but the ratios will apply to all regions, since we’re only extending the amort.

The taxes, maintenance, and insurance are not included in these numbers either. Also excluded are utilities, or anything else really. We’re just using the cost of the mortgage today, since that’s what’s being influenced. Actual costs are likely to be higher.

Minimum Monthly Payment Drops Over 12%

Lengthening the amortization lowers payments, when comparing the same sized mortgage. Using the numbers from above, a borrower would pay $3,562 per month on a 25 year schedule. On a 30 year schedule, that payment drops to $3,103 per month – down 12.88%. Lowering your payment gives a little more wiggle room, and improves payment “affordability.” This is how the government, banks, someone profiting from your mortgage, and idiots look at the numbers.

It Increases The Amount of Interest You Pay

The government and industry always forget to mention it’ll cost people more… a lot more. The payments we ran on the 25 year amortization work out to a hefty $351,103 in interest payments over the term. Over a 30 year amortization, it jumps to $431,511 – about ~22.9% more than a 25 year term. Same house, lower payments, but you end up paying over 22 cents more per dollar you pay back.

Lower Payments, A Lot More Interest

The amount of interest paid on a Canadian mortgage, with an average mortgage rate of 3.59% over the term.

Source: Better Dwelling.

It Makes Housing More Expensive In The Long-Term

Extending amortizations only makes housing “more affordable” temporarily, since credit inflates prices. Lowering the cost of borrowing is often thought of as a way to increase affordability. After all, less interest being paid mean you can increase the amount you can pay down on principal. Less money to servicing your mortgage means cheaper housing, right?

Bank of Canada Housing Affordability Index

The percent of income used to service mortgages across Canada. This number includes mortgage payments, and utilitilies.

Source: Bank of Canada, Better Dwelling.

That only works if buyers don’t have to spend the increased credit on the same house. Over the past 5 years real home prices across Canada have increased 42.65%. The amount of disposable income to service this debt increased only 12.65%. Affordability today actually improved across Canada by 7.29% since 2007. Real home prices have increased 86.54% over that same period. Outside of government and banks, few people would say doubling home prices is an improvement in affordability.

If you’re a real estate agent stuck on “home prices will go higher?,” remember that’s long-term. Real estate works in a cycle, and once it’s made an exhaustion move – prices need to correct for new buyers to enter. Near term, we’re looking at a global synchronized downtrend for home prices. If you’re a believer that home prices lead the business cycle, a recessions follows to purge economic inefficiencies. Recessions make it difficult to push prices higher. Instead, we would be likely to see the impact in the next real estate peak, in a few years.

The important thing is borrowers with a 30 year amort will pay less towards principal. While it does cost borrowers more, and it inflates home prices – it boosts bank revenues. Improving bank revenues is going to be a priority soon, since mortgage growth at the banks has dropped to multi-year lows. In hindsight, it seems less like a tool to improve affordability, and more of a stealth bank bailout.

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45 Comments

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  • Mica 2 months ago

    Bay Street Guy comes up with a Bay Street solution, while robbing Millennials. What else could we expect from him?

    • Micheal Brown 2 months ago

      Where did they call him a Bay Street Guy, and how is lowering payments “robbing millennials?” A bit of an aggressive stretch.

      • Mica 2 months ago

        They didn’t, everyone else calls him the “Bay Street Guy,” like it’s a good thing.

        https://www.hilltimes.com/2017/03/06/bay-street-guy-morneau-defender-middle-class-despite-privileged-background/98545

        They’re robbing millennials by creating a backstop on falling prices, and inflating the amount that can be bought later on. If the over valuation was caused by a shortage of supply, an increase in supply should correct those prices. If they normalize that young people will have larger mortgages over a longer period, they normalize the liquidity of overpriced homes.

        • ak 2 months ago

          Brown must be the same realtor that thinks a 96 month loan on his high country king ranch truck is a great deal.

          • Bluetheimpala 2 months ago

            I worked in auto for 8 years (a vendor side, would never sell my soul to an OEM, they are toxic)…this is hilarious. Blue likes. Tock. BD4L.

  • Quan Li 2 months ago

    It’s not quite the Harper era 40 year mortgages, but I also gather these won’t be as temporary. The 40 year mortgage was to prevent falling prices. The 30 year amortizations we’re talking about today are to boost “buying” activity.

  • SUMSKILLZ 2 months ago

    “Stealth bank bailout”…never thought about it that way. Yikes.

    • Winnie 2 months ago

      Look at the HCG fiasco, with the government introducing Buffett to a non-market lower share price to bolster stock confidence. This is how Canada does things.

  • Gareth 2 months ago

    All Canadian politicians feel the need to prop up asset prices. No free market, means we all end up paying to subsidize failed inefficiencies. Kill the CMHC, and let the free market decide on accommodating growth.

  • Canuck550 2 months ago

    Common your telling me you didn’t see this coming…
    Next is 30, 35 and 40 year amortizations for non first time buyers, keeps the cycle going!
    As formerly mentioned enjoy the ride and profit from it

    • Aaron Schwartz 2 months ago

      Increasing amortizations don’t make you more money, it prevents people from losing money at the cost of devaluing your currency. They’re backstopping prices, by socializing the losses. It’s a terrible idea, and makes me think Maxime Bernier is our only hope… which is sad really.

      • Canuck550 2 months ago

        Its the glue that will hold this together and increase prices, that is how money will be made!
        We will eventually end up with a USA model of amortization

        • Neo 2 months ago

          Canuck550,

          You have no idea how credit cycles work. They are necessary to purge the system and reset for future gains more relative to income levels. Money is made on the way up and on the way down. Bulls and Bears get fed and Pigs get slaughtered. You think it’s a wise idea to just keep feeding the Pigs and it’s not.

          Canada isn’t a reserve currency so we will never have 30 year fixed mortgages. We don’t have the liquidity to make that happen.

          • Canuck550 2 months ago

            Neo

            Oh trust me and my bank account certainly knows how the credit cycle works.

            Its all these Dorthy’s on the board that seems to wish the market lower..
            They should click their heels together and do some more wishing in the world of OZ .

            As soon as amortization extension becomes a reality the market will stabilize. That is fact, and the way we got here, why? People are greedy and like to spend what they don’t have

  • Al Daimee 2 months ago

    Introducing a 30 year amortization is going to enable more buyers to get into the entry level markets, which are already very competitive in Downtown Toronto. Expect more bidding wars and increasing prices to come if the 30yr am. is an option.

    Already, we have seen bidding wars in January and that is mostly coming from the holdover buyers from last year. This time of year, the new buyers are just getting familiarized with the market and are going to be in for a bit of a shock if not properly educated on the current market environment.

    • GTA Realtor 2 months ago

      Are you talking about the three bidding wars that were created by under listing? Lol. I thought you were a professional, Al – not a schmuck that doesn’t understand Realtor games.

      • M.Bury 2 months ago

        GTA, completely with you. These types know what’s coming and they’re holdin’ on by their fingernails.

  • Gregory 2 months ago

    The US has had 30 year mortgages for decades – the key in Canada is having well priced 10, 15 or 30 year fixed interest Mortgages, rates like the US.

    At my bank. TD

    5 yr fixed at 3,75% (special rate)
    10 yr fixed is 6.10%

    Seems crazy – when,

    5 year Canada bonds are 1.82%
    10 year 1.92%
    30 year 2.16%

    Imagine a 4% 30 year fixed mortgage in Canada or even 5%

    If the goal (Stress Test) is protect buyers from Interest Rate shock – force banks to offer competitive LONG Term Mortgages.

    • Treble and Bass 2 months ago

      Canada’s 5 year rate roulette is such a pain in the butt, but demand is already dwindling for Canada’s MBS. The BOC said they would only step in to buy on a non-competitive basis at the last auction, and somehow needed to scoop 4% of inventory.

    • Im Therious 2 months ago

      “If the goal (Stress Test) is protect buyers from Interest Rate shock…”

      As Deepthroat once remarked, “follow the money”.

      Companies need to protect their profits so they hire lobbyists to convince politicians to make rules that create a “win-win-didn’t know you lose” situation.
      – Win for the companies
      – Win for the politicians
      – “Didn’t know you lose” for consumers

  • MH 2 months ago

    This debt circus for the benefit of banksters and short-term political gain is getting predictably insane in its desperation. No wonder the populism of all sorts is rising sharply.

    Not sure if they really don’t know that this move was on the checklist of every RE bubble before and never worked, or they just don’t care to come up with even remotely plausible justification for more fleecing of the financially illiterate.

    “Insanity: doing the same thing over and over again and expecting different results.” – Albert Einstein

    But then again who said that well being of the general public is their top priority.

    • Einstein never said that 2 months ago

      Don’t believe everything you read, MH. For example, that quote you attributed to Einstein. There’s zero evidence he ever said such a thing. You may want to consider fact-checking your sources, as it makes the rest of your statements less credible.

      • MH 2 months ago

        Dunno, I don’t have a PhD in Einstein Quotes. Hereby I promise not to stumble into this field of science ever in hopes to regain my tarnished credibility.

  • Unspeculator 2 months ago

    This was expected, but I don’t think it will be enough to prop up the market. It may create a bit of support in the summer, however it is a short term play.

    • Rudy 2 months ago

      Expanding credit capacity when it’s no longer being maxed out is usually a way to prevent falling prices, rather than a way to actually boost prices. Like Stephen is saying, I can see it pushing the next exhaustion move in a decade or two even higher, but I think the increase is likely to preserve rental prices since mortgages usually become cheaper before home prices stop falling.

    • MH 2 months ago

      The effect will be largely symbolic. It’s a bone to be thrown to the RE industry and bankers. An aid that can be used for another month or two to lure gullible into the lifetime of debt slavery.

      On the other hand the effect of the current self-forced lending standards tightening will be infinitely greater. I wouldn’t be surprised if the content the mortgage books over the recent years is 80% junk-fiction. The bonuses are real though.

      Watch The Big Short if you didn’t, watch it again if you did.

    • SUMSKILLZ 2 months ago

      Agreed. Major banks are wrecking deals right now by not approving financing, via low evaluations. If you’ve been alive long enough this is deja vue.

  • Asterix1 2 months ago

    Trudeau needs to stay away from this! Let the cycle continue on its downward path.

    If young people are dumb enough to support this move (30years amortization), they are clearly clueless in all fronts.

    OSFI and others (non RE Cartel types) needs a strong backbone to stop T2’s pathetic vote gathering scam!

    First time home buyers have options:
    – If in GTA, wait and rent. You are not missing anything right now.
    – Prices are heading south in all categories (condos are next, stay clear, it’s a hot potato and the music is about to stop).
    – Don’t read or believe anything related to RE in MSM.

    T2 plans are criminal! Let the cycle do it’s thing….

  • no 2 months ago

    This article isn’t even based on the real issue. The author is using the mortgage contract rates in his calculations when the issue at hand is the stress test. Making the allowable amortization 30 years STILL does almost nothing for 1st time home buyers in the GTA given the ultra restrictive stress test we currently have.

    And for those of you bitching about a 30 year amortization. Rents at the moment are about equal to a mortgage payment for any given property. So would you rather pay rent or have a 30 year amortization with some principle reduction acting as a savings account?

    • Ethan Wu 2 months ago

      Guy that calls paying an extra $100,000 on a typical home “almost nothing” thinks someone else missed the point. 😂

      You’re comparing new rent. The average person in Toronto is paying $1200/month, which is less than the cost of a mortgage. 40% of condo investors are negative cap in Toronto, meaning rent is cheaper than buying.

      Have you considered maybe the author sees your point, but it isn’t valid because you don’t know what you’re talking about?

      The stress test is to protect the MBS HOLDERS that fund the mortgages. Eliminate the stress test, and the cost of funding a mortgage will rise to the consume the buffer.

      You either get tested for the ability to pay a stress tested mortgage, or you pay the higher rate. One is a test, the other is actual money. Which one do you think people that qualify want?

  • Grizzly Gus 2 months ago

    One of the biggest weaknesses in our political system is politicians making short term moves in an election year to the detriment of the future. True of all parties.

    Extending amortizations/ removing the stress test type moves should be used when shit actually has hit the fan or when we are in a bad recession to provide stimulus. Doing so now to keep the party going will just make the eventually fallout worse when it rolls over.

    Furthermore, on top of that 80-90K in lost future income those extra 5 years of being mortgage free are sometimes crucial to maximizing your savings to provide for your retirement……. Of course today’s politicians will all be long gone by the then

    • Lurkosaur 2 months ago

      “….more of a stealth bank bailout.”

      “….payment drops…. down 12.88%.”

      I think this change prevents the current crop of highly indebted homeowners from defaulting when they go in for their next mortgage refinancing (and interest rates are higher). In which case, it’s an attempt at saving the Canadian financial system (including banks, home owners and the Government) from a lot of pain.

      So may be they’ve already seen enough to know shit’s gonna hit the fan very soon? Not saying it’s right but may be they are trying to manage the fallout the best they can.

      • SMH 2 months ago

        Yeah, let’s save the morons that over leveraged themselves on their 7th investment property on the tax payers’ dime.

  • Zenity 2 months ago

    1. Real estate is a neccessity, bloated home prices are a drain on young families. People end up tightening their lives and their children’s lives so the people who bought real estate before can profit. This is same as jacking up price of cancer drugs but worse, since every family needs a home.

    2. Toronto have enough housing for its people, the problem is many people buy ‘investment’ properties. When you have an affordability crisis we need to find way to force these people to put these property into the market. These people are speculators they can afford to lose a little value.

  • NJ 2 months ago

    If someone asks to jump in to a well, will anyone jump?, well stupid does…

  • Flint 2 months ago

    Phew! I was getting worried there for a minute. It’s time Canadian politicians get back to doing what they do best: causing systemic imbalances in our national economy that threaten the the life and leisure of future generations, in order to buy votes.

    A compelling return to form. Outstanding move!

  • rocco 2 months ago

    why is everyone so upset? Toronto will eventually be a majority renter city. Why does everyone need to own a house? I think renting is just fine. let someone else take all the risk in home ownership. they take the risk – if property value goes up or down so what to the renter. i think lots of people are jealous of homeowners and investors that made lots of money and are trying to tax or regulate them out of homeownership. most people in society are losers including most on this forum, therefore we need to provide rentals for them.

    • Joseph 2 months ago

      Rocco, there used to be a boardgame people played called Monopoly. Find a copy of this game and get back to the basics. You’re the exact reason this specific boardgame was created.

    • SG 2 months ago

      Nice trolling. But there’s no risk to homeowners if the government constantly intervenes to prop up the market, right? Otherwise I’d agree with you. Abolish the CMHC and let banks take on the full risk of their real estate bets. Leave the taxpayers out of it.

    • george 2 months ago

      You must be bleeding lots of money due to current downturn. No problem for the losers here, but you will be losing more and you know that.
      You can come back later here again and call names, but at the end of the day the real looser is you.

  • Sam 2 months ago

    It is always better to pay little more interest and have a home rather to save interest and you rent. The affordability problem cropped up because of the stress test. Even if we go by your calculations, the impact of paying higher amount of interest can be offset by making additional payments which every bank/company allows from 10% to 20%. It is a welcome step and will be a big relief to first time home buyers.

    • george 2 months ago

      It depends….I pay on my rent which has heat and cable included less than what others pay for Maintenance fees + Strata Fees + Property Taxes for the same appt size in the same area. Yes, my rent goes up but also the Maintenance fees and the rest for the rest. I did NOT include what you would pay the banks for huge fees and mortgage interest, therefore the difference I invest wisely or put on RRSP.

      However, to pay more interest as you mentioned…hello?? why would you do that??? feed the banks? there are so many ways to enjoy life than be a slave to the banks.

      As I said, it depends. Some would like to be free and save money, others to be slaves and feed the banks, realtors and the rest of the bunch for 30 years or more.

    • Mike 2 months ago

      For those that would have the discipline to do that (effectively pay off their mortgage in 25 years despite the opportunity to take 30 years), that would be fine and makes sense.

      The problem is, this is a move to keep RE valuations over-inflated, rather than letting them continue on their downward trend. So the disciplined person still pays a lot more than they would if amortization was only 25 years for everyone, because they paid more than they should have for the home in the first place.

      This is true Orwellian doublespeak, to state it’s a move to help affordability for new homebuyers, when it’s actually a ploy to keep home values up for boomers and developers.

  • Joey 2 months ago

    I have 3 rental properties in the GTA. Best investments I have ever made.

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