On July 9th, 2012, the government implemented mortgage rule changes that dictated 25 year amortizations for mortgages where home-owners placed down payments less than 20%. Home-owners who placed down payments in excess of 20% were still able to obtain longer amortization terms as they are typically deemed as less ‘risky’ borrowers.
Now, as the Toronto Star reports, there are now talks as to whether or not the government should enforce 25 year amortizations on even those home-owners who have put down 20% or more.
Currently, mortgage amortizations up to 35 years are available to home-owners who place down payments of 20% or higher. The proposed change would limit amortizations to 25 years for new buyers; current home-owners would be able to retain their current amortizations as things stand.
On a $250,000 mortgage at 3% interest, the difference between 35 years amortization and 25 years amortization is approximately $225.00 per month. The proposed change would force Canadian to pay off their mortgages more quickly, undeniably a positive effect, however; at the same time demanding that Canadians put more of their monthly cash-flow into their mortgage payments.
Canadians with down payments in excess of 20% are often disciplined savers, home-owners looking to down-size from their current home, property investors, or first-time home buyers who have prudently saved enough cash – telling them what to do with their money and when is misguided – these are not the people that misuse and abuse debt.
What are possible after-effects of this potential rule change?
Property investors who typically purchase homes in order to rent them out may find that they must increase the rent they ask for in order to compensate for their decreased cash-flow due to the amortization change. Potential first-time home buyers may have no choice but to pay these increased rents as mortgages become too expensive to carry and renting remains the only option.
Typically prudent home-owners, now required to put more money into their mortgage each month, may resort to high interest credit cards and other costly avenues to address cash flow issues – for home-owners who resort to these options, the benefits of putting more into their mortgage each month will be negated by the high interest rate credit cards they may be forced to use.
Ultimately, fewer Canadians would qualify for and be able to maintain these mortgages; thereby making houses more difficult to sell and for first-timers to move into the market.
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