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New Mortgage Rules Illustrated


Source: The Globe and Mail, January 21st, 2011

While the effective elimination of the 35-year mortgage could diminish housing prices, economists say it’s not possible to calculate the degree of dampening with any certainty.  That’s in part because some homeowners take long mortgages initially and then change the terms later, paying more than required in order to retire the debt sooner.  And there are a host of other factors that determine housing prices such as interest rates, employment growth and housing supply.

The new rules can be expected to dampen both home sales and prices as potential home buyers face new limits on how much they can borrow, encouraging them to opt for cheaper homes, economists said.

Below is a chart showing what amortization periods home owners chose over the last 4 years.  It clearly illustrates that the government may have had a reason to be concerned with the number of buyers choosing longer amortization periods, thus stringing their debt out for longer allowing them to pay lower monthly payments but in turn, WAY higher interest.

Douglas Porter, deputy chief economist with BMO Nesbitt Burns Inc., said the changes would reduce the amount that people can borrow by up to 7 per cent.

Corresponding price declines, though, are hard to predict. Canada’s housing market has been cooling for months and interest rates are widely predicted to begin rising again during the latter half of this year.

“I suspect that what we’ll end up seeing is home prices about flat this year,” Mr. Porter said.

Bank of Nova Scotia economists Adrienne Warren and Derek Holt suggest the new limits on amortization will add about $100 to the monthly principal and interest payment on an average priced house, compared with a 35-year mortgage.

“Looking further ahead, as interest rates begin to move higher in 2012 and beyond, the cumulative impact from shorter amortization options on housing affordability could be substantial,” their report said.

The Bank of Canada hinted at a link between prices and amortization rates last year, when deputy governor Sheryl Kennedy said “financial innovations” such as longer amortization rates can “encourage speculation in quick flip financial investment.”

That surge in home buying helped drive up prices, particularly in large urban centres. As a result, since 2007, increasing numbers of Canadians have opted for mortgages with amortization periods stretching well past 25 years.

Initially, 40-year mortgages saw the most explosive growth until Mr. Flaherty took action in 2008 to do away with those unconventional loans.

The following year, however, marginal consumers increasingly turned to 35-year mortgages to fill the void, a trend that continued well into 2010.

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