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Tuesday, April 25, 2017

Goodbye 40 Year Mortgages

Posted by Tim Stobbs on July 14, 2008

Goodbye 40 year mortgages and good riddance. Yes after talking about a potential bust in the housing market it is good to see our government is now doing something about it. Now really it isn’t a significant change. After all you can still get a 35 year mortgage after Oct 15, 2008, which still creates a huge interest bill for you (but huge profit for the bank).

The more significant change is requiring 5% down payment instead of just 0%. Perhaps someone woke up and realized that maybe, just maybe, we should make potential home owners prove they have some excess cash flow and can save for a house prior to buying one. This will be the change that drags down the market as first time home buyers will have to sit on their hands for a few years to save a down payment.

Yet as good as these changes are they still don’t really deal with all the people that already have a 40 year mortgage with no money down. Now assuming they are like most people who take 5 year fix rate mortgages at some time in the last two years. That would mean if we have higher interest rates around 2012 to 2013 we could see a bit of a problem. At least in the in term we know the bubble can only get so big.

Comments

11 Responses to “Goodbye 40 Year Mortgages”
  1. Jordan Clark says:

    At first I thought this would significantly soften up demand in the market by cutting out those first time buyers taking too much risk and flippers trying to turn a quick profit.

    But then I read further into it and realized this only affects CHMC backed mortgages but there are apparently 5 other private mortgage insurers who I’m sure have no problem continuing to offer this crummy product.

  2. Ruth says:

    I really hope that changes like this will help the housing market slow down without busting.

    I don’t own a house and I’m tired of seeing people with bad credit buy houses they can’t afford. You know they can’t afford it and they will lose it in a few years. But since they keep doing it they drive the cost of houses to high for people who are being responsible.

    There is a vindictive side of me that thinks ‘Good, all you fools will be losing your house just when i have saved up a down payment’. But i know a bust will hurt more than just the housing market. I’d rather avoid what is happening in the states.

  3. Four Pillars says:

    I don’t see why this change will make any difference. The buyers have to be approved on 25 year amortization and how much they put down is irrelevant since it’s the ability to make the payments that is important.

    Mike

  4. Sarlock says:

    When my wife and I were house shopping for our first home 5 years ago, our bank was very happy to run our incomes through their little calculator and exclaim with lots of glee that we were qualified for a nice fat mortgage. They made a point of mentioning this to us many times and when we stated that we were only looking for a house about half that value, we were almost convinced to go and get a bigger house since we were qualified for so much more!

    Add in the 40/0% mortgages and there are scads of home buyers prancing happily around looking for a house right around their maximum approved amount, happy to lock themselves in to a debt that very likely still be requiring payments well into their retirement.

    Fortunately, my wife and I didn’t take the bait and purchased a wonderful little home for only half of what our approved mortgage amount was, and for the past 5 years have very happily made our small mortgage payment and laughed at co-workers and friends who struggle to make ends meet.

    If we see a significant softening or even a crash here in Canada, we will see many of the same effects as we are seeing across the border. History has demonstrated that we are far more linked economically to our southern cousins than we care to admit.

    Speaking of poor lending practices, this article gave me a chuckle:

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aejBj0fFSjpo&refer=home

    Apparently giving out big mortgages to customers with unverified income wasn’t a good practice!!! Who knew?

  5. Canadian Dream says:

    Jordan,

    Good point I did fail to mention you can still get one elsewhere.

    Ruth,

    You might actually just time that right and buy a nice house for cheap. Keep saving!

    Mike,

    Actually you are somewhat correct. The issue is a super sized 25 year mortgage using their rules I would find hard to keep up with myself. Add to that poor or no savings and over consumption habits and people will easily walk from a house if the value crashes. So add more houses to a buyer’s market would drive prices down further. Each person isn’t a problem by themselves, it’s all of them acting similarly which has the potential to be dangerous.

    Sarlock,

    Good story! I know it is insane what they will approve you for. With my first place I was approved for $260,000 and bought a place with a $108,000 mortgage. Yikes. I can’t imagine having over $200,000 in just a mortgage.

    Tim

  6. telly says:

    Mike,
    Are you sure that you need to be approved for a 25-yr amortization first? I’m pretty certain that is not the case.

  7. Four Pillars says:

    Telly – I’ve read it in several places on the internet – so no I’m not sure.

    I think that only applies to CMCH (or whatever) mortgages ie the ones where you have less than 20% down.

    I can’t honestly say I know what I’m talking about however.. :)

  8. telly says:

    Mike: Lol…well that makes two of us. It’s a good thing Cheap always says he listens to everything we say! :o

    The mortgage calcultors I’ve seen seem to indicate that longer amortizations = higher pre-approval. I also (sadly) know a few people that discovered their pre-approval amount increased when they increased the amortization period. I believe all the banks really care is about your monthly carrying costs, so if you can afford $2000/mth mortgage payments it will obviously change the total approval amount if you go with a 40-yr AM rather than a 25-yr.

  9. Four Pillars says:

    Telly, you are probably right.

    Bottom line is that some people will find a way to mess up their finances, regardless of what controls are in place. :)

    Mike

  10. Mr Doom and Gloom aka Garth Turner has been harping on 40 year mortgages for a while. He keeps saying were in for a US style meltdown. Personally I can’t see it being that quite that bad. I think what you’ll see is, short term, a softening of the housing market, and long term, a 25-30% drop in prices. In comparison to the last bust in the late 80s.

    Longer term those who bought 40 year mortgages will really suffer as wages fail to keep up with expenses.

    Over here in Europe Spain and the UK are going through major housing meltdown. Spain in particular is hard hit as the market is so massively over built (over million unsold homes) and over priced. Prices were way out of whack to wages, think Toronto prices on Tim Horton wages.

  11. telly says:

    Rob, I don’t know much about the late 80’s bust but 25-30% drops seem like a pretty hard fall no?

    Considering the number of people that are borrowing equity (from gains rather than pre-payments) from their homes almost every year to renovate, 25-30% could in fact create a meltdown. Again, I don’t know much about previous real estate collapses but it seems to me home equity loans are far more common today than they’ve ever been.

    If anyone has some insight about the “olden days” ;), I’d be really interested in reading about it and how things might differ this time around (if at all).

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