30+ Year Mortgages and Undoing the Past

So with all the coverage on the government’s recent decision to scale back the  mortgage amortization limit back down to 30 years I’ve been a little surprised on the media coverage.  Most of the stories have been like this one from the Globe and Mail, which gives you the facts and not much more.

Yet if you dig around a little bit I’ve noticed a few interesting additional facts:

  • As of last November, about 30% of all new mortgages had picked the 35 year amortization.  So the change is actually significant for new home buyers and for those with longer memories about 6% of mortgages in Canada have 40 year amortizations (see here).
  • The first 30 year mortgage only came into being in 2006, shortly afterward it was spun out to 40 years.  Then in 2008 they cut the 40 year mortgage and now in 2011 in the 35 year mortgage.  Doesn’t that seem like an really short time period to make all of those changes?(see here).

What happened?  Well let’s do a little digging into that and find out how bad the debt situation is by looking at the source of most mortgage insurance in Canada: the CMHC.  While their 2010 annual report isn’t available yet you will notice from their 2009 report a few interesting facts.  In 2005, CMHC had a total liability amount of $96.6 billion, but the end of 2009 that had grown to $263.5 billion while a projection for 2010 of $311.2 billion.  So from 2005 to 2009 that is an increase of 172%, wow that is some growth.  Yet what is really interesting is the growth from the 2009 value to 2010 plan: $47.7 billion.  Now doesn’t that seem a little huge when the projected federal stimulus for 2010 was a mere $37 billion?

You see the real story here isn’t changing the rules back but rather the change in debt.  Yes while changing the rules in the first place did provide a huge boost to Canada’s economy which allowed us to ride out the recession most of the world was suffering.  All that boost to GDP was basically from people like you and me taking on mortgage debt.  The growth of the last five years is mostly on personal debt which is backed by the CMHC and thus guaranteed by the federal government.  So if people fail to pay their huge mortgages, we just get to pay it back in taxes if the situation gets too bad (Meanwhile the banks get away with all that interest money…mmm, what is BMO’s share price this morning?).

What is more interesting is to realize that this huge growth in our housing markets is basically the direct result of letting people take on more debt.  Prior to 2006, people could only afford so much and with the market had a natural limit.  Once the was extend, of course people took on more debt and housing prices increased, in some places rapidly (see here for a few eye opening graphs).

Now once the mistake is obvious, that people have taken on too much debt we end up with a very large house of cards called our housing market that is facing interest rate hikes in the next year or two.  Not exactly a stable situation, so after trying to warn people via the Bank of Canada, the government has had to undo the past and halt this freakish experiment prior to things exploding in their face.

Yet the final thought of the whole situation is this: had we never started this trip into super sized mortgage amortizations your housing would be much more affordable that it current is across this country.  So if you have a 30+ mortgage, that is partly your own choice, but feel free to blame the government as well.

2 thoughts on “30+ Year Mortgages and Undoing the Past”

  1. It is too much liquidity in the system. I went in to the bank to ask for a 25K line of credit (HELOC), but I got a 300K line of credit by the time I left the bank.

    The change in mortgage rule by the fed government is essentially managing/reducing the exposure to the real estate. As much as others might complain about it is too late and/or too little, it is a good start to manage the risk now.

    Hopefully people will not misinterpret it as if “we will see a housing boom in the next 60 days before the new rules kicking in”.

  2. I have read different publications writing negative comments about the new rules. Those statements seem to be all from mortgage brokers and others standing to gain from people stuck in the prison sentance mortgages.

    I think the rules should even be tighter. People have to go back and save a decent down payment and sacrifice for a while. Our new society of instant gratification brings long term misery.

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