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New Mortgage Restrictions May Include 30-year Amortization in 2014
Canadian policy makers have used the United States’ housing market as a cautionary tale for our own benefit. To ensure Canadians don’t fall into the same dilemma, regulators have created new mortgage rules to limit housing risk since 2008. They have been great preventive measures to allow the Canadian housing market to remain stable.
However, home prices continue to rise and policy makers are wary of high-risk borrowers. For additional preventive measures, there’s a good chance we’ll see new mortgage restrictions in 2014 and one of them may include 30-year mortgages. This may affect first-time home buyers the most, forcing them to wait to buy a home and to take the time to save up more money.
Currently, potential home buyers find 30-year mortgages desirable since it allows them to pay off their loan in smaller amounts. However, this isn’t necessarily a good thing. A 30-year mortgage compared to one that lasts 20 or 25 years translates into extra years to make mortgage payments and up to 23% more interest throughout the mortgage’s term.
Here’s what might happen if regulators place a restriction on 30-year mortgages:
- It can be completely eliminated.
- They may continue to allow 30-year mortgages, however borrowers will have to prove they can afford a 25-year mortgage.
- Anyone considered a high-risk borrower (anyone who has higher credit scores, higher down payments or lower debt ratio limit) won’t be eligible.
The last two options will give strong borrowers the flexibility to transfer mortgage payment to better sources, such as paying down high-interest debt, making investments, financing education, building a small business, etc.
If banks no longer offer 30-year amortizations, you will still be able to get them from credit unions. However, keep in mind, according to Andy Poprawa, CEO of Ontario’s credit union regulator, “Credit unions have traditionally been very conservative. When credit unions lend money on a 30-year mortgage, they’re also taking into account other debts. Because credit unions are smaller than the large banks, they must be very, very careful how they utilize their capital. They can’t afford to have large delinquencies.”
Mr. Poprawa also mentions, “At this point and time there is no plan to do anything to change any of the [mortgage] regulations…” While there is nothing set in stone just yet, it is important to remember to be prepared for what is ahead, and to understand the benefits and consequences involved when buying a home and the choosing the right mortgage options for you.
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