Amortization Rates.  Will they keep going up?  What's the solution?

Is the housing affordability crisis pushing the dream of homeownership beyond the realm of possibility for some Canadians? And while industry insiders believe short-term solutions should be adopted to offer some relief, the head of the country’s housing agency cannot agree on a solution.  

We have come to a point where Canada can’t overcome its housing affordability crisis without adding more supply of homes, but this solution will take years. In addition, Canada is having record rates of immigrated coming into the country which puts more pressure on the hosuing market.  According to a recent study conducted by the Canada Mortgage and Housing Corporation (CMHC), Canada needs to add 3.5 million units by 2030 for affordability to be restored. 

Is this wishful thinking or can this actually come to realization?

Many First Time Home Buyers are looking for some sort of assistance. Whether it be some financial aid from family or the government.  Currently, interest rate levels are high especially when taking into consideration todays housing prices.  We also have persistance inflationary pressure driving up the cost of living.

The director of public affairs, Jasmine Toor, for Mortgage Professionals Canada (MPC) argues that extending amortization periods to 30 years from 25 years for borrowers who get an insured mortgage (those making a down payment of less than 20%) would help more Canadians enter the housing market. She also argues that the current home price cap of $1 million should be bumped up to $1.25 million for insured mortgages.  She believes “these policies would help to eliminate some of the barriers to entry that are causing younger Canadians to give up on the dream of homeownership.”  

I'm going to pause here and ask...Does a First Time Home Buyer need a $1.25 million home?  Could a first time home buyer not purcahse something smaller and at a later date sell this home to purchase something larger when they can afford it?  I have no opnion on this.  It's just a question?

On the flip side CMHC president and CEO Romy Bowers disagrees, recently telling the Canadian Press that extending amortization periods “just makes credit more available.” She argues that while the policy change would lower monthly payments for borrowers, it ultimately increases the cost to homeowners long term, which she fears could exacerbate affordability challenges. “What I worry about is sometimes that seems like a quick fix,” she said. “If you just have 30-year amortizations, everyone’s mortgage payments will go down by $200 and they can actually afford the house, but if you’re in a supply-constrained market and that’s your solution, it’s not going to solve the problem in the long term.”

Instead, Bowers wants the industry to focus on increasing the supply of homes across a wider spectrum of price points, with a better balance between the high and low ends of the market.

I will interject again with my thoughts on this.  Who is increasing the supply of homes?  Where is this magic solution coming from? The government?  Developers?  A combination of both?

Toor agrees that supply will help balance the market in the long run, she says that Canadians need more solutions to ease short-term affordability challenges.

Beyond extending amortization periods and keeping house price limits for insured mortgages in line with prices in Canada’s major cities, she says the federal government could also eliminate the stress test on mortgage transfers, switches and renewals. Toor also encourages the Canadian government to convene a permanent national housing roundtable with stakeholders from across the country to share best practices across jurisdictions.

“Very little has been done to address the housing affordability challenges that Canadians are facing now,” she said. “We believe the federal government, including CMHC, can show more leadership in this area.”

The case for a 50-year amortization

While getting the government to accept 30-year amortizations for insured mortgages may be a challenge, some say they should go even further.

Dustan Woodhouse, president of Mortgage Architects, is advocating for a maximum amortization period of up to 50 years for existing borrowers facing higher monthly payments.

Let's keep in mind that labour is not getting less expensive, the materials are not getting less expensive, the price of land is not going to go down, and the government fees are not going down.  Who wants to get paid less?  I sure as hell do not!

Is an extended amortization the best solution?  It may alleviate some very significant tension in current mortgage holders’ households for the short term.

Woodhouse emphasizes that his proposed solution would only apply to debt servicing, and could not be used for qualification purposes, as that would only drive up prices. Ultimately, he believes it’s better to let Canadians extend their amortization periods to what some might consider extreme lengths than let them lose ownership of their homes.

So let's consider this.  If you are a tenant, there is a possibility that you could be a tenant for life.  Is that a better option that owning a home with a 50 year amortization?  Some places around the world do have 50 year amortizations. 

Woodhouse does explain that most lenders can extend amortizations, but only offers it once borrowers have already burned through their savings trying to keep up with higher mortgage costs.

Woodhouse also goes on to explain “a majority of lenders are capable of offering up to a 40-year amortization, which takes the edge off in a big way, however they will only offer that if you know to ask, and typically only offer it to people who have missed a mortgage payment.  Shouldn’t we be proactively trying to help Canadians manage these payments before they are in a crisis?”

Here is another thought to think about.  If Canadians were offered an amortization up to 50 years would they seek to pay it down sooner once they are more financially stable?  Are the bank penalties too high to do this? Some banks penalize quite a bit logically want to pay down your mortgage.   

Lastly, to the reader thinking, it’s just ridiculous that someone 55 years old should be able to take a 40 or 50 year amortization, they’ll be 95 or 105 before they pay off their house.  Maybe that's not the point.  Maybe the point is to be paying down on your home and at some point selling it and renting when you are older.   Wouldn't you rather be paying into yourself and growing your money and later selling your home to be able to add that cash back into your bank account?  

There is not one single correct answer.  But there do seem to be many points of views.  Hopefully the Government can agree on something sooner than later.


Sources found here and here

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