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The case for increasing amortizations

by Neil Sharma on 25 Sep 2019

Interest rates are expected to rise—when has become anyone’s guess—and if they do, amortizations must as well.

“If you look at the reduction from 40 to 35 years, it coincided with a reduction of interest rates by almost a full percentage point in a short span of time with no visible indication of those rates rising again anytime soon,” said Dustan Woodhouse, president of Mortgage Architects. “Each subsequent amortization cut—from 40 years to 35, 35 to 30, 30 to 25—mathematically was roughly the equivalent of a 1% interest rate hike and it offset the lower rates. In other words, reducing amortization by 15 years was the equivalent of a 3% interest rate difference. So interest rates fell about 3% from historical averages but the shorter amortizations put the payment in line with a higher interest rate over a longer amortization.

“Naturally, as interest rates move up, you want to undo the changes, but the problem is math is hard, and at some point they forgot in government that the reason they reduced amortization all the way down to 25 was to address the amount of mortgage people were qualifying for.”

In 2007, when the interest rate was 6%, a borrower with a $100,000 income qualified for the same mortgage money that they would a decade later when the interest rate was at 2.5%.

“Even though interest rates fell by more than half, you technically didn’t qualify for more mortgage money,” said Woodhouse. “People had the perception that Canadians were able to get themselves into bigger mortgages than ever before because of lower interest rates. It didn’t matter what was real; politicians needed to address the perception.”

A Mortgage Professionals Canada (MPC) study authored by economist Will Dunning demonstrated that if the interest rate rose to 5.5%, the B-20 stress test would bring the housing market to a standstill because it would be next to impossible to finance residential real estate transactions.

Andrew Scheer announced this week that, if elected, he would raise amortizations to 30 years for first-time buyers and loosen the stress test for regular purchasers, as well as eliminate it altogether for renewals.

The announcement was welcomed by MPC, which has lobbied for change.

“We are delighted to see our recommendations included in the Conservative Party of Canada platform,” Paul Taylor, MPC’s president and CEO, said in a statement. “I am very encouraged to see the real concerns of our members, and the would-be home owners they serve, have been addressed in such a positive manner. Accessible home ownership is an important issue for all Canadians. Thank you to Andrew Scheer and his team for having heard our concerns and responding so directly.”

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