Forty-year mortgages spark concerns
By Tara Perkins – Globe and Mail
Canadians are flocking to 40-year mortgages, often without a down payment, and the rapidly developing trend is beginning to ring alarm bells for policy makers in Ottawa.
Both the Finance Minister and the Governor of the Bank of Canada are expressing concern about the situation, as the U.S. economy continues to reel from a crisis triggered by mortgage holders who were in over their heads.
“We’ve seen an inclination now, a trend, toward longer-term amortizations and smaller down payments, and that is a matter of some concern,” Finance Minister Jim Flaherty said yesterday.
Forty-year mortgages have only been available here since late 2006. Anthony De Almeida, chief executive officer of the Canadian Equity Group Inc., estimates that 25 to 30% of home buyers are now asking for them.
One banker from a large Canadian bank said the majority of new mortgages it is doing are now for 40-year terms.
“Over the next couple of years, you’re going to see more and more people utilizing the 40-year amortization, just because it lowers your initial mortgage payments,” Mr. De Almeida said.
Growth is rapid. Last year, only 9% of outstanding mortgages were for terms longer than 25 years, but 37% of all new mortgages were, said Jim Murphy, chief executive of the Canadian Association of Accredited Mortgage Professionals.
What is really troubling some policy makers and economists is the use of long-term mortgages with little or no equity. No-money-down mortgages “really came out of the gate about five years ago,” and now at least one-third of first-time buyers toy with the option, Mr. De Almeida said. He estimates 15 to 20% of first-time buyers are taking out 40-year mortgages without a down payment.
There is concern that a one-time rise in real estate prices could result if the bulk of Canadians get into longer-term mortgages, said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.
“Any kind of a shift in lending practices that makes it more affordable for everyone will basically just drive up the price,” he said. “The other concern is that it could be leading to a situation where people are paying a lot more interest over the entire term of the mortgage than they otherwise would, and it could ultimately weaken household finances.”
Canadian consumers as a group could have less net savings down the road because many will still be paying off mortgages later in life, he added.
Bank of Canada Governor Mark Carney recently told the Commons finance committee the central bank is concerned. It is his understanding that “the vast majority” of people taking on longer-term mortgages could qualify for a traditional 25-year mortgage. But the trend is adding momentum to the real estate market and “if everyone has a 40-year amortization mortgage, then we just have higher house prices and the same availability,” Mr. Carney said.
For the moment, the easy debt is helping to keep the real estate market humming, economists said. Any damage would be down the line.
“The bigger question is what happens as you go off two, three, four, five years from now, and it’s no longer just a significant share of the new applications, but it’s a significant share of the outstanding market,” said Derek Holt, an economist at Bank of Nova Scotia. “I think we’ll be in uncharted waters as to the sensitivity to shocks that most households will find themselves facing.” If there is a shock in jobs, interest rates or commodity prices, “unless you see the arrival of 60-year mortgages, then you’ve got a household sector that’s really backed itself up against the wall.”
But he and most economists agree Canada’s mortgage market is sound, and is not susceptible to the trauma taking place in the U.S., where there were even riskier products, a greater use of mortgage brokers, and a stronger tendency for banks to sell their mortgage portfolios.
Dave McKay, head of Canadian banking at Royal Bank of Canada, recently said RBC is warning customers about longer-term mortgages. Staff tell them costs will go up and there are pitfalls, he said. But customers are saying they still want the longer-term mortgage to free up cash in the short-term, and they plan to pay them off in less than 40 years with lump-sum payments.
“Customers have consistently told us that they plan on managing it,” Mr. McKay said. “Whether they can all do it or not is a good question.”
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