Mortgage Amortizations

January 18th, 2011 by Potato

First up, the 5th edition of the Canadian Real Estate Blog Carnival is up on Landlord Rescue.

In the news today, the government tweaked mortgage lending rules slightly, reducing the maximum insured amortization to 30 years, maximum refinance LTV to 85%, and removed government insurance for HELOCs.

The various financial forums are still discussing the HELOC issue — I’m not sure myself how many HELOCs were actually insured, so it’s probably a minor issue. Refinances should likewise be a small piece of the pie. So that leaves the reduction in amortization. On the one hand, this is something that will influence almost every first-time buyer, as huge swaths of that section of the population have been opting for the maximum amortization to grab as much RE as they could. I myself would have preferred an increase to the minimum down-payment at the same time, but we’ll take what we can get. What’s the impact? Very briefly, if someone had a maximum mortgage budget of $1000, then:

At 35 years, they could get a $260k mortgage at 3%, or $198k at 5%. With the new 30 year maximum amortization, that same $1000 monthly budget gets $237k at 3%, and $187k at 5%. The effect is interest-rate dependent, but it means that for someone at the very edge of affordability, their maximum house price just went down something like 5-9%. Not a huge effect, but hopefully something to get the ball rolling.

2 Responses to “Mortgage Amortizations”

  1. Patrick Says:

    You mean the “real estate implosion” ball?

    Personally I thought the HELOC thing was bigger in my mind. Interesting that the government has taken the stance that the public shouldn’t insure consumer debt. That’s a good thing to have “on the record”. I think this may be the first step in re-examining the entire role of the CMHC.

  2. Potato Says:

    This might be a good time for me to dust off the draft of my letter to my MP about rejigging the CMHC to move away from a flat-rate insurance fee, and get some kind of formula that adjusts based on measures like price-to-rent. Something that would actually make for a negative feedback system, which might actually add stability to the system…

    Canadian Capitalist had a link to a TD report today, suggesting that few HELOCs were insured to begin with.