Broker considers interest-only mortgages

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One broker believes maximum amortization limits should remain unchanged but that first-time buyers should be given the option to make interest-only payments for the first few years.

“I think the amortization should remain at 25 years, but I think first time home buyers should be allowed to pay interest only payments in the first five years, even on an insured mortgage,” Warren Ross of Mortgage Intelligence wrote “This will give first time home buyers the ability to furnish and renovate their homes without running up too much consumer debt.”

Ross expanded on his position by estimating that a homebuyer with a $250,000 mortgage could save $500 per month – and around $30,000 in total – in those first five years. He also considered a cash back component to ensure the saved funds are properly utilized.

“Perhaps a cash back component can be added with proof of (renovations) or furnishings,” Ross wrote. “Perhaps the combined rate of interest only on the mortgage and the cash back could be much lower than the current five per cent cash back rates that nobody can afford.”

However, payments would increase after that five-year grace period – and rates could fluctuate in that time – meaning clients would be required to be much more financially healthy for the remainder of the mortgage’s life to ensure they meet the increased payments.

The comment was sparked by a discussion around longer amortization periods for first-time homebuyers, a suggestion put forth by the Canadian Home Builders Association.

The Globe and Mail recently obtained government documents that show the CHBA had 61 meetings last month with officials and politicians to discuss proposals including longer amortization periods for first-time homebuyers.
  • Ron Butler on 2015-06-26 10:44:28 AM

    Low down payment, insured, interest only mortgages for purchases = utter insanity. I wish we could see more rational articles generated on this board.

  • Keith Uthe on 2015-06-26 10:46:00 AM

    This would be no different that what banks in the U.S. were doing before the melt down. giving home buyers a cheap mortgage payment for a short period of time and then jacking the payment up to where they could not afford it.
    A $360K mortgage has an interest payment of roughly $800 per month right now. If you convert that to a 5 year term amortized mortgage over 25 years that payment is nearly $1,500.00.

    Realistically how many people do you know that could successfully adjust their lifestyle to having $700 per month less to spend on lifestyle and have to put it towards a mortgage.

    Then when they can't make their payments and get foreclosed on there has been no equity build up in the home for them to hopefully get something out. Realtors won't want to list the home as there is a great chance that there isn't enough money in the deal to pay the commission fees.

    The banks will end up selling the home at a discount and relying on the mortgage insurance to cover the balance and then CMHC will go after the borrower through civil litigation for what they paid the bank.

    The banks are currently afraid to even allow existing homeowners that have a history of making payments the ability to get an interest only mortgage up to 80% loan to value, what makes you think that they would in any way even consider an idea like this. They wouldn't for all the same reasons I stated above plus others I did not.

  • Dustan Woodhouse on 2015-06-26 10:55:05 AM

    There is a direct correlation between increased foreclosure risk and reduced equity in a property.

    With the majority of FTHB's opting for Condos, which in the 'raging insanity' of the Vancouver market even have still seen little more than a 7% increase over the past 5 years, and in many parts of town flat results or even a decrease, this would be sowing the seeds of disaster.

    With interest rates so low currently clients are seeing greater than 50% of their payments go towards principal reduction. Todays rates present an opportunity to build equity faster than ever in a property.

    Few things are as strong an economic buffer as the stability of equity in a property.

    Paying a 3.8% insurance premium, leaving 1.2% Equity in the property, then building zero equity in that property over the first 5 yrs would slow the move up buyers down significantly. (unintended consequences of the best intentions)

    In many cases there would not even be enough equity to cover the cost of selling the property 5 yrs later. Yet another reason people would consider throwing the keys at the bank and walk away.

    Building Equity = Good idea
    interest only = Bad idea

    my two cents.

  • Henry on 2015-06-26 12:10:15 PM

    This is good if after 1 or 2 years they can afford to pay. Otherewise in places like GTA it causes even bigger bubble.

  • Joe Cutura on 2015-06-26 1:26:37 PM

    I agree with the above comments. There is no need to look at interest only mortgages for FTHB even if it's only for a few years. It's obvious that many Canadians are in debt and it's not a bad thing for people to actually save money for the furniture, renos, etc. it's that habit of saving that a lot of people are missing (down payment coming from parents in a lot of cases, etc.).

    It's true that with interest only payments people would have more money available for furniture/renos but it would be at the expense of the equity in their home as Dustan pointed out. From my experience, most people would just spend that extra money that they have (and not necessarily on their home). If you were to monitor people on the spending (such as the purchase plus improvements program) now you're talking about devoting extra resources from the lender which is costly.

    So my moral of the's important to teach people to save money (client initiated) as opposed to making a payment smaller (lender initiated). There's a reason why the Bank of Canada talks about the high consumer debts almost daily. We've lost our ability to save and need to get it back! The next article will be "So and so suggests that FTHB defer their property taxes for a few years to give them a break". In my opinion it's no different than that.

  • Raymond Green on 2015-06-27 4:54:18 PM

    interest only would be making the path for a future disaster similar to the usa subprime market crash

  • Michele Hall on 2015-06-29 5:46:38 PM

    Do we want another mortgage market melt down ? Real estate markets can take a down ward turn at any given time . If you are only paying interest on the mortgage if four years down the road the market does take a downward turn and your home is valued less than you mortgage ... people will walk and we will have another mortgage market melt down !!!!!!!!! why not bring back 30 year amt, with accelerated payments only !

  • Ryan on 2015-06-30 4:46:53 PM

    I remember when insured HELOC's worked like this, clients could pick 5 years INT only then amortized payment over following 20 years or 10 years INT only then amortized over next 15 years. After the 5 years was up, clients did not quite remember the "agreement" and caused them to scramble for alternatives. Dangerous game, people don't plan for the future....

  • Darr Robbins on 2015-08-11 9:34:34 AM

    IO Mortgages is just plain nuts. Look what happened to the ARM products and its impact on US real estate.

  • Guest 1 on 2015-08-11 9:35:17 AM

    IO Mortgages is just plain nuts. Look what happened to the us ARM products and its impact on US real estate.

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