35 Year Amortizations, Good-Bye and Good Riddance!

On March 18 of this month CMHC will no longer allow mortgages amortized over 35 years (meaning if you follow the payment schedule it will take you 35 years to pay off the principal and interest on your home). This has caused a feeding frenzy on the market as primarily younger home buyers rush to get an agreement to purchase in place before the March 18 deadline at a time when listings have been low. The result has been more bidding wars, more buyer frustration and homes, in many cases, selling for more than they are worth.

I guess this might be good news for home sellers but the majority of them are trying to buy in the same market so it's probably a wash for them. Bottom line is more listings will be on the market in March and April and the market will probably adjust itself a little.

If a home buyer purchases a home with a 5 year closed mortgage and only 5% down, they effectively pay no principal from their mortgage at the end of 5 years! This would be like only making minimum payments on your credit cards. Interest rates have been at historic lows for quite a while; they can really only go up and home prices have been rising steadily so no one has really noticed but we will eventually have a market correction in price (for any number of reasons- this is the historical cycle). If this coincides with a rise in interest rates a number of people could see their mortgage payments rise. The cumulative effect is increased consumer debt.

The long-term health of the Canadian economy (and real estate market) will be much healthier if we can reduce consumer debt and this will be good for all of us! So, kudos to the government for eliminating 35 year amortizations! As a side note, the extra cost of carrying a $100,000 worth of mortgage under current rates will amount to about $40 per month.