+25 Year Amortization for Mortgages

[patriot1]

Exactly, just as their counterparts in Japan and the US did.

Seems the PTB in Canada haven't learned. Or maybe they have learned and are doing this deliberately, which is even worse.

[millergd]

A really harsh, long recession would shake some sense back into the housing market...didn't extended mortgages have their last go-around in Canada in the late 1970's?

~millergd~

[beluga]

I would like to offer to reshape the discussion from:

1) "Are 40 years mortgages, causing higher home prices now?"

to:

2) "Are these higher home prices sustainable for the next 5 years?"

If we can all agree that 1) is yes, we can put that distraction aside.

For 2), I'm hearing historic examples and strong opinions against sustainability. I actually have a home down payment waiting at PCFinancial betting on that.

But I do worry that people will just be content with being mortgage slaves for the long term. Go to work, pay 35% tax, pay 50% on housing, live on 15% and have no savings besides some equity in the home. Could this persist for a whole generation?

[pitz]

Well beluga, if expanded P/E multiples are the new 'norm' in housing, then certainly, not so long from now, they'll also be the new 'norm' in stocks.

I'm not so sure that cash savers will be any better off waiting, because the monetary policy authorities have pretty much stated outright that they will expand the money supply to such an extent that bank failures will not occur in a widespread fashion. The amount of growth in the money supply to accomplish this will send (non-financial) stocks to the moon, but will probably not substantially grow the purchasing power of a cash saver (who, ironically, as a byproduct of this process, will receive next to no interest on his/her cash).

One of the ironic things is that by having your savings at a bank, in the form of cash lent to a bank, you are actually helping to keep home prices higher than they ought to be by providing funds for additional lending. The RE industry, of course, likes to overstate the risk involved in using investment in sound and growing businesses, as a means to protect and grow a housing downpayment. Having someone keep their downpayment funds in a savings account is the 'next best thing' for the REIC if they can't sell you a house right away.

[patriot1]

But I do worry that people will just be content with being mortgage slaves for the long term. Go to work, pay 35% tax, pay 50% on housing, live on 15% and have no savings besides some equity in the home. Could this persist for a whole generation?

No, any more than it could persist in Japan and the US.

You're forgetting that people almost always trade up from their first purchase. But with a 40 year amortization, it takes decades before the purchaser has enough equity to trade up. So you get a whole cohort of first time buyers unable to move up. This is why we say demand is borrowed from the future (with interest). Eventually total demand drops below the level when 30 year amortizations were the norm.

Meanwhile the supply of housing expands greatly due to the higher prices (not so much a factor in Japan due to strict land controls). Result: "ghost towns" and empty condo towers. Something has to give, and that's prices.

It is completely beyond me how anyone could think that exotic mortgages could prolong high prices indefinitely when we have proof of the contrary displayed so bluntly south of the border.

[AltaRed]

It is completely beyond me how anyone could think that exotic mortgages could prolong high prices indefinitely when we have proof of the contrary displayed so bluntly south of the border.

Only politicians, mortgage brokers and similar short sighted folks who live in the present (relatively speaking).

[Money101]

Why are 40 year mortgages considrered risky or Canada's "US-style subprime"?

Do all borrowers of 40 year mortgages have a poor credit rating? If not, is it the income to debt ratio that's risky?

Related article:
Warnings about risky mortgages ignored

[AltaRed]

1. They are taken out by people stretching to buy as much house as they can, with minimal to zero down payment. No patience to wait to move up. Have a McMansion now.
2. None of this implies a poor credit rating - indeed, the borrowers may have an excellent credit rating.
3. The mortgage becomes underwater if house prices soften (which they have).
4. Mortgage payments may be hard to pay if one or both of the income earners lose his/her job in a recession and there is no buffer left to re-finance the mortgage or work out new arrangements with the lender if the mortgage is underwater.

[patriot1]

Do all borrowers of 40 year mortgages have a poor credit rating? If not, is it the income to debt ratio that's risky?]

Stop looking at the borrower and look at the asset.

Asset financing is risky if the amount loaned is greater than the fundamental value of the asset. In the case of housing, that means if the mortgage payments (and taxes, etc) are greater than the rental value.

That's the, er, fundamental issue. 40 year amortizations allow prices to exceed fundamental value more than 25 year amorts because they reduce monthly payments for the same purchase price.

Oh BTW re the discussion up thread - told you so.

[squid]

1. They are taken out by people stretching to buy as much house as they can, with minimal to zero down payment. No patience to wait to move up. Have a McMansion now.
2. None of this implies a poor credit rating - indeed, the borrowers may have an excellent credit rating.
3. The mortgage becomes underwater if house prices soften (which they have).
4. Mortgage payments may be hard to pay if one or both of the income earners lose his/her job in a recession and there is no buffer left to re-finance the mortgage or work out new arrangements with the lender if the mortgage is underwater.

A lot of misinformation here. All things being equal, a mortgage with a 25 year over a 40 year amortization is more secure as the applicant has higher thresholds to meet, but a 40 year mortgage could be advanced on a house with over 50% equity and lower than 20% TDSR (I actually paid off a 30 year amortization mortgage in full in October)

Why? I like good cash flow. Pay cash when I can, and try and minimize monthly payments. I make generous prepayments yearly. Mortgage is rock solid.

If you want to have stronger mortgages, it is equity to loan and TDSR that is important. A longer amortization, assuming the first two are strong, lowers payments and makes it less likely a default will occur.

I also see a lot of HELOC which are essentially a mortgage with an infinite amortization. Those are even more dangerous, then?

[twa2w]

HELOCs require 20% equity - previously they required 25% until the PTB reduced the requirements.

But yes they are essentially unllimmited amortization.

Cheers
J

[squid]

HELOCs require 20% equity - previously they required 25% until the PTB reduced the requirements.

But yes they are essentially unllimmited amortization.

Cheers
J

Right. So it's the equity requirements that are the problem, not the amortization.