Feb 2011 16

Banks Moving to 30 Year Amortizations

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Vancouver House House in Vancouver by pnwra

After the government announced a legal change in house-debt insurance and subsidies, banks started to come out with adjustments to their mortgage-related product portfolios.

One by one, major Canadian banks—the biggest mortgage providers in the country—announce changes they will undertake in response to the federal government’s policy changes.

The Buildup

A few weeks ago, Canadian federal government announced that the maximum amortization period for low-ratio mortgages will be reduced to 30 years from the current 35. This change applies to mortgages with a loan-to-value ratio of more than 80%. Anybody with a down payment of less than 20% of the house price will thus be ineligible for more than 30 years of mortgage. This is a response to dangerous levels of housing debt in Canada, as well as the wildly rising prices of properties in most provinces.

Ever since the announcement, everybody has been anxious to hear the banks’ answer to this regulatory change. Many borrowers wanted to know whether banks would continue to offer longer-term mortgages for low-ratio borrowers and under what conditions.

The Reaction of Our Banks

So far, news from Laurentian Bank, Scotiabank, Toronto-Dominion Bank and Bank of Montreal has not been very optimistic. All four of these major banking corporations have decided to curb the maximum term for all mortgages, that is to say both low-ratio and high-ratio, to 30 years. This reaction is akin to the situation in 2008 when major banks undertook similar measures. The banks argue that the shortening of the amortization period is going to contribute to Canadian housing debt reduction.

Shortening amortization periods only solves a part of the problem, however. Much of the housing market inflation comes from the fact that buyers provide minimal down payments and such mortgages are insured. Any risk of default on the page of the borrower is borne by the insurance company, not the lender. And for those reasons, banks release much more money, buyers bid higher, and the spiral rises. Unfortunately, the insurer is Canada Mortgage and Housing Corporation (CHMC), which is a government agency. This means that the risk of mortgage defaults is in fact borne by all taxpayers.

At the time of writing this article, there has still been no news from CIBC and ING Direct.

The Better News

A ray of hope for borrowers is coming from Royal Bank of Canada (RBC), which is reportedly considering that it would maintain the 35-year option. In either case, RBC seems to be most likely to offer more lenient terms to its clients, considering its history.

The only financial institution openly in support of longer-term amortizations for low-ratio mortgages is Merix Financial, which will thus remain the prime outlet for long-term mortgages.

UPDATE: To further decrease the affordability of mortgages, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce (CIBC) are raising some of their fixed-term mortgage rates by 0.25 percentage points.

Stay tuned because JayBanks.ca will keep you updated with more real estate news as other banks issue their statements.

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