Canadian Government still looking at shorter mortgage amortizations on real estate purchases, but no indication of decision yet
So much talk, so little action. Typical of a government, so I probably shouldnt be surprised
On December 22 I wrote Flaherty comments further on Canadian Real Estate and Mortgages and on Janaury 13 I reported in What is the Bank of Canada doing with mortgage rates? that Flaherty was still looking at what to do.
Today comes news that… drum roll please… Jim Flaherty is still “watching and monitoring” the real estate market in Canada
“As you know, we took steps a year or two ago to require at least a 5% down payment and to restrict the amortization period for insured mortgages but we’re watching that. Low interest rates obviously are having an effect on the strength of the housing market in Canada,” he said, warning “people have to make sure that the mortgages they take out today either have a fixed rate or they know that they’ll be able to handle increases in that mortgage rate later on.”
CIBC World Markets senior economist Benjamin Tal says the bigger issue for consumers would probably be an increase in downpayment as opposed to a change to amortization schedules. Even though half of mortgage origination is said to be going for a longer amortization, Mr. Tal issued his own report that shows 40% of Canadians opt to make an extra month’s worth of payments each year.
Called accelerated bi-weekly payments, consumer make payments every two weeks instead of twice a month and the impact is considerable. “On a $250,00 mortgage with 5% rate amortized over 30 years, that works out to a de facto shortening of the amortization period by five years,” says Mr. Tal, adding if rates rose by 75 basis points, consumers could absorb the increase by simply stopping the accelerated payments.
Mortgage credit was up about 7% year over year when Mr. Tal wrote his report but he thinks dramatic changes to downpayment levels and amortization are not necessary at this point. “Be careful you don’t kill a fly with a hammer. You could derail the housing market for no good reason,” says Mr. Tal.
In real estate circles, many privately grouse about Mr. Flaherty’s overreaction to an improved housing market that still fell well short of records set in 2007. “You don’t want to see anything that affects the ability to purchase,” says Gary Friend, president of Canadian Home Builders’ Association. “You make changes and in a place like Vancouver where I am, it could have a significant effect. At the same time we respect the need for prudent credit conditions and smart borrowing.”
What do you think – should the government further tighten the regulations around minimum downpayments and amortizations? Let me know by leaving a comment below