Brokers and bankers square off on 30-year amortization

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While bank economists seem increasingly resigned to the potential loss of the 30-year amortization, brokers insist that move would unfairly tie of the hands of clients looking to maximize the bang for their buck.

“I would say that most clients opting for a 30-year are well able to qualify for a 25-year one,” said Peter Puzzo, a mortgage agent with Assured Mortgage in Woodbridge, Ont. “So the government removing that option would really only reduce their cash flow and force them to put money into a mortgage instead of investing in other areas. I’m not sure that would send a good message to consumers.”

The analysis comes on the heels of a panel discussion of Big Five economists Thursday, with several suggesting the government is most likely to drop the maximum amortization to 25 years if, in fact, rising household debt spurs another round of mortgage rule changes.

“If we see the housing market surprise on the upside and debt growth surprise on the upside, then the government will likely take action to further tighten mortgage insurance rules,” TD Bank economist Craig Alexander said. “Quite frankly, if you can’t afford a mortgage at 25 years versus 30, then you probably shouldn’t be buying a house in the first place.”

Puzzo and many other industry veterans disagree, suggesting, 30-year amortizations are largely used to free up cash each month, money often better spent paying down higher-interest debt or channelled into high-yielding investments.

“It’s not a question of whether they can afford a shorter amortization,” he told MortgageBrokerNews.ca.

Still, the government may have little choice but to make some kind of move to further slow the growth consumer debt, the panel of economists said Thursday.

Specifically, total household credit debt increased by 5.5 per cent between 1991 and 2000 and by another 9.3 per cent in the 2001-2010 period.

But that’s in stark contrast to mortgage debt, according to a new CMHC report. The proportion of residential mortgage debt to household debt was fairly stable during the 2001 - 2010 period, fluctuating between 69.0 per cent and 67.7 per cent.
 

  • Debra on 2012-01-10 3:26:33 AM

    Consumers are still going to take their payment to the maximum allowable limit which will still effect their available cash flow; if they are going to make changes again why don't they decrease the TDS and GDS and leave the amortization along by decreasing TDS and GDS it will at least leave consumers with more disposable income each month as I believe thats where the real issue lies. None the less the consumer will still take their payment to the maximum allowable limit but have more dollars available each month.

  • James Robinson on 2012-01-10 3:37:24 AM

    I find it interesting that there is so much focus on mortgage rules when the real problem seems to lie with consumer credit rules. I am just reviewing a credit card statement from one of my clients and there is a disclosure on the statement that say if you pay the minimum payment every month, it will take 112 years and 10 months to pay it off. It would seem that maybe the banks are lobbying the government to force people to have smaller mortgages that they pay off faster in order to allow them to carry bigger and much more profitable credit card balances. Maybe, if the government is really interested in the interests of Canadians, they should focus on changing some rules in the credit card business.

  • James on 2012-01-10 3:38:44 AM

    At some point, squeezing clients' ability to borrow at preferred rates (mortgages) will come back to bite the banks when more and more consumers declare bankruptcy on their unsecured credit card debt.

  • Jeremy on 2012-01-10 4:00:12 AM

    The issue is not mortgage debt, when will these idiots figure that out! The banks are skirting around the real issue and that is consumer debt ie. credit cards, vehicle loans, etc... Lowering the amortization will have a negative affect on both home owners and the housing market alike.

    Consumer debt will continue to rise regarding of mortgage policy. Once the Government slaps tighter restrictions on consumer credit facilities ie. credit card company, vehicle finance companies, then and only then will this nonsense decline. Consumers need to be protected from the predatory banks!

    Just my thoughts...

  • Kevin J. Power, President Power Mortgages Inc. on 2012-01-10 4:05:21 AM

    Reducing the amortization is definitely a move backwards. If the government and banks are serious about curbing consumer debt, change the lending practices of revolving debt, with minimum or interest only payments. Lenders should go back to more installment type of lending, with debt retirement practices, instead of products that keep most people in a permanent state of debt.

  • Paul Therien, Director Business Development, Centu on 2012-01-10 4:30:53 AM

    Reducing the amortization on a mortgage from 30 years to 25 has minimal impact on reducing consumer borrowing. Given the average size of the mortgage in Canada, it makes a difference of aproximately $150 per month. This is equal to the minimum payment on a $5000.00 credit card, which we all know is primarily interest.

    The banks are not going to object to the further tightening of mortgage lending because it keeps the governments eyes off of their unsecured portfolio. Unsecured lending accounts for as much as 30% of the income that the banks make, by far the largest and most profitable segment of their business. It is why, even in the credit crunch, they have expanded their unsecured lending products.

    What our government fails to realize is that unsecured lending has a larger impact on cashflow than mortgage lending. Particularily when home ownership has already been proven to be more affordable than renting in most areas (Vancouver is currently a rare exception).

    What they (government) do see is the most powerful lobby group in the country saying "its mortgages lending that is the issue".

  • GTA Broker on 2012-01-10 4:34:38 AM

    They just don’t get it, do they? Economics 101, says cool off a hot market by making it more difficult to borrow, heat up a cooling economy by loosening up lending. We are cooling off in many markets, that were never as hot as TO & Van.

    Canadian institutional (read bank) mortgage lending has been on a 10 year roll, like drunks on a bender, abetted by their “drinking buddy” CMHC.

    Agree that a 30 am, is too long a time in general, but maybe it should be allowed for first time buyers, or mortgages that start under a specific price( remember restrictions in 1992 when the first time buyer program was implemented? Should we look at something similar?)

    Before Christmas, when “Red Ed” Clark at TD/CT was screaming for more government controls on mortgage lending, what he was really saying was that lenders can’t police themselves. If bank A will do the deal why can’t bank B? If Johnny jumps off the bridge, would you jump off a bridge? What kind of people do we have running our banking system!
    The real culprit in this whole mess is the least regulated & that is credit card debt. We all see people in our practices, every day with 3,4,7,8 cards maxed out. Miss a payment or two & they jack-up a single digit interest rate to 24% to 31%. Yes the borrower got themselves into it, just like a druggie gets caught up in drugs. Just like the drug dealer on the corner offering their product, there is a credit card flogger at every department store, bank, grocery store, frosh week, the list is endless. There really is a huge similarity. Get’m hooked & you own them forever!
    Put some sense back in the system, put the boots to the credit card lenders, understanding that it will impact the economy significantly, especially retail goods. Gradually tighten the mortgage underwriting “standards” that have been perverted over the last 10 years.
    Will there be pain? No doubt about it. But an uncomfortable pain now, beats an agonizing pain later.

  • Sua Truong on 2012-01-10 4:43:07 AM

    Mortgages are internal/local to Canada and government can force changes there. I may be wrong but credit cards are global and I believe our government has very little authority to extend beyond our borders.

    Its doubtful that our government has the backbone or will to force the issuing card company to abide to similar lending guidelines as mortgage financing.

  • Geoff Charkow on 2012-01-10 5:13:41 AM

    It makes sense for the banks to be recommeding this as a way to protect their high margin products (lines of credit and credit cards). Margins are much, much lower on mortgages so if reducing the amortization makes it more difficult to qualify than there would be less options for consumers to pay off their high interest debt and keep the banks margins on retail credit high. It's easy to keep attacking the mortgage industry without addressing the real issues.

  • Vancouver Broker on 2012-01-10 5:43:29 AM

    One idea that has been kicking around since the governments first round of mortgage rule tightening is this: force unsecured debt issuers to qualify their borrower, in the same way we have to qualify our mortgage borrower - verified income, credit quality etc. The penalty for not doing so might be that if the borrower defaults, and said borrower was improperly qualified, the lender would then have no recourse against the borrower. The same way CMHC insurance forces the mortgage lender to follow the rules and do things properly.

    Just an idea that will likely never be implemented, given the profitability of credit cards and influence of bank lobbyists

  • Omer Quenneville on 2012-01-10 6:26:43 AM

    Why not just make the qualifying amortization 25 years but once qualified one could opt for the 30. That way they could spend the saving on other things like Reno’s which does a lot to spur the economy. Just like the qualifying rate is the 5 year posted.

  • Golden Horseshoe Broker on 2012-01-10 6:41:23 AM

    Root of the problem is not in the amortization, I have been brokering for more than 20 years and there has never been any changes to the actual mortgage application. If you are OCTO-MOM with 18 kids or one of many "DINKS" duel income no kids, you get the same credit application with the same ratio allowances. Mortgages applications 20 years ago, there were no monthly cell phone bills, no $200 -300 per month cable/internet bills. No GST portion of HST on every purchase. Gas was .40 a litre, and your monthly heating bill wasn't $400 to $500 per month in the winter months. And yet when you walk in to the bank, none of these new expenses or increased older ones show up on the application. What about the family with 2 small children in full time daycare at $1800 per month, oops not their either...What about that new couple who intend to start a family, and that extended mat leave, where you only get 50% some are even less for the next 9 months, and then will have the full time daycare after that...

    I honestly believe the removal of the 30 year amortization is solely for our politicians ability to sleep at night when the "Canadian R/E Bubble" finally bursts. They can say, but look at what we did to try and stop it....

    Too little too late... They need to revamp the entire mortgage application process... Otherwise nature will take care of itself, and we will see us follow the US solution and lop off 30 - 60% of value, and only then will housing actually be affordable once again....

  • Annonymous on 2012-01-10 7:13:27 AM

    The real problem with consumer debt are credit cards! High interest rates, and what seems to be almost unlimited credit, especially if you don't miss your payments. Consumer's refi their mortgage to be in a better position (pay off debts) and then end up racking up credit cards again. The other issue is the way IRD penalties are calculated. Why do different banks have different ways to calculate that? In some cases the refinance is starting out higher than the original mortgage amount because of a ridiculous penalty. And the big 5 have some of the worst. Why doesn't the government make it a standard calculation OR go back to the old rule of 3 months interest if you are 2-3years into your mortgage term? Tightening the mortgage rules is not going to do anything for consumer debt, just drive more people to bankruptcy. What has been done so far has not affected credit card spending as it is seen as something apart from mortgages. DEBT IS DEBT!

  • Ron Butler on 2012-01-10 7:28:21 AM

    I think the banks worry about a housing bubble in Canada. They have all stressed tested a 20% decline in property values and it is not pretty picture. It's not deadly to them but its not good either. Therefore when Ed Clark; who is the most politically connected CEO, asks for 25 year amortization he wants to continue the attempt to achieve a "soft landing" in an over charged property market.

    Too little, too late? Maybe, but saying nothing seems like a bad option.

    All the discussion of credit cards is a wasted arguement. The banks model and stress test their CC losses if unemployment increases and deliquencies go up dramatically and the card interest rates are so high and the profits are so good, they are comfortable with the results of the tests.

    Real Estate agents and mortgage brokers hate to hear about 25 year amortization because it strikes directly at our day to day income but the bank CEOs have bigger fish to fry and really don't care what we think.

  • Vancouver on 2012-01-10 7:31:41 AM

    The fact of the matter is that homeownership in Canada has not spiked with the current guidelines and with the lower rates. There is still aprox 30+ % of the population that rents. GOLDEN HORSESHOE you seem to miss the point that income has also increased in the past 20 years, so the additional expenditures, albeit tough, and not that much different. Monthly day care 20 years ago for a child was 300 per month, to many back then still very unaffordable.

    As for the government not being able to regulate credit cards, not so. The federal government has the jurisdiction to regulate any activities that take place within the country, they simply choose not too because of the sheer wealth and power of the lending companies, including banks. Other. Untried around the world have done it, but then their governments don't pander to big money the way Harper and his cronies do.

  • Re... Ron on 2012-01-10 7:43:03 AM

    What makes you think the market is overcharged? Soloing as there is still healthy demand for property there is no bubble. Add to that that even I the market most Canadians consider "over inflated" , Vancouver, there is still a very strong market with very strong sales. Has it slowed? OF COURSE it has, most people are waiting for the removal of the HST before purchasing a new property or even an existing becauseofnthe implications that it has on the cost to own. The consumer has been saying it for a year.

    This is not about brokers complaining about their day to day income, it is about the consumer. Mortgage deliquency in Canada, even at the peak of the crisis, did not exceed the banks allowed threshold for arrears. It is today still at less that a 1/2 percentage point, which is much lower than the maximum 3% that most lenders allow for.

    Credit card debt is an issue when people are in financial stress because of two primary reasons. 1) the banks do not have reasonable lending practices when granting unsecured credit, how many people NEED a 50k unsecured credit card or line of credit? (2) consumers are not taught effective financial literacy, by anyone. Sure it is now a big deal to teach it, but why is it only a big deal now, and why is it that the banks do not actively support it?

    The number one debt that causes financial stress is credit card debt. If the banks tightened their lending requirements on unsecured, and maybe charged a reasonable rate of interest, then they would not have the issues with bad debt that they do today.

  • GTA Broker Re: Golden Horseshoe Broker on 2012-01-11 2:21:49 AM

    "Goldie", like me, you are an "old fart" in this business. You remember finance companies doing up monthly budgets to qualify clients. Sensible, rational, but impractical & not cost effective in today's "mortgages are all the same, treat them like a commodity" world.An attitude that will certainly exacerbate any future potential increase in mortgage delinquency & therefore declines in property values.
    It would also add about 100 more boxes to fill in on a D&H app.(Does anybody really know who owns D&H? I don't mean the income trust, I mean who is behind the trust, the "real" owners.)

  • Lior - Mortgage Edge on 2012-01-11 5:13:07 AM

    I really don't understand why the amortization has become such a central issue. It's merely used a cash-flow tool by homeowners. Do the banks think they have some kind of moral obligation to limit the options homeowners have? Why not start by not selling increasingly restrictive mortgages that limit the options of consumers? Why not focus on reducing mortgage fees and costly penalties instead of nickle and diming consumers at every opportunity. Those fees are what needs to be addressed, not the length of the amortization. As long as the government allows the banks and their powerful lobby at the CBA to dictate the rules of the game, they'll just continue to come up with policies that are good for the bank but bad for the consumer.

    When the government decided to phase out the 35 years amortization (albeit they're still available for consumers who don't require default insurance), how much did homeowners actually save? With a $300,000 mortgage based on current rates this translated to less than $100 a month in savings. Do the banks actually think that consumers put that $100 towards other forms of debt? Thanks in part to stagnant income levels, I very much doubt it. In fact, since the government made these changes, all the big banks have actually *increased* their service fees by up to $60 a year on some services. So the customer might be saving a small amount of money by having a reduced amortization, but that money is now going back to the bank in the form of higher banking fees. Pure genius I must say, transferring the wealth from homeowners to bank shareholders and executives.

  • Gord McCallum - President First Foundation Residen on 2012-01-14 6:11:49 AM

    Lior - "Do the banks think they have some kind of moral obligation to limit the options homeowners have?"

    I'm not sure if they feel it's a moral obligation, or more of a right they have. For decades the banks have held all the cards - and close to the vest at that. The consumer had no choice but to accept their advice as gospel truth.

    The growth of the brokerage industry in Canada has democratized the availability of information, has led to a more informed and educated consumer, and it weakens the bank's position as the sole arbiter of what is good and true (at least in their thinking). The bank, in a more competitive environment, has less ability to manipulate the consumer through FUD (Fear, Uncertainty, and Doubt).

    An informed consumer is a good one, in my opinion, but the banks for the most part don't feel that way.

Broker news forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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