By: Sam Reiss
What do you think about 30-year mortgages?
This time last year, Jim Flaherty was lowering the maximum amortization period from 35 years to 30 on high ratio mortgages. This year, there’s talk of further reduction down to 25, if consumer debt continues to climb.
Critics say that if you can’t afford a mortgage over 25 years versus 30, you should be looking at a cheaper property. But a number of financial experts take the view that it isn’t a matter of affordability; it’s a matter of freeing up cash flow for paying down higher-interest debt or buying higher-yielding investments — which makes perfect sense if that’s what you actually do with the money you’re freeing up. It works less well if you’re blowing it on vacations and dining out.
In recent months, many experts such as Arkadi Kuhlmann, CEO of ING, have offered the opinion that 30-year mortgages are simply outdated; that, unlike at the time of their creation in the 1940s, no one stays in a house for 30 years anymore. While locked-in interest rates may provide peace of mind, buyers pay for it with front-loaded interest costs, slow equity build-up and various refinancing fees. The government should provide incentives to pay off mortgages quickly, not drag them out.
But in Canada, is there really any harm? While consumer debt has risen by nearly twice as much in the last decade as in the decade prior, mortgage debt has remained fairly constant. Personal lines of credit have increased to an average of 25% of household debt from about 3% in 1986 — that scares me a lot more than a 30-year mortgage.
Here’s a great observation from David Chilton of Wealthy Barber fame: “People cannot resist lines of credit. And the worst combination in the country is a line of credit and a home renovation — once they renovate one room, the other rooms pale by comparison, so they go on to the next and it’s a never-ending cycle of renovation as they get deeper and deeper in debt. The four most expensive words in the English language are ‘while we’re at it.’ And the four most expensive letters are HGTV.” Last year, the government removed insurance on home equity lines of credit. Maybe they, and not just mortgage rules, need a second look this year.
Canada’s mortgage system has failsafes the US lacks, which helped keep us out of trouble in the first place: almost all Canadian mortgages are “full recourse,” meaning that borrowers are held fully responsible for their mortgage amount even in foreclosure, our fix-interest rate maximum is only five years, mortgage insurance is more common, we don’t get to deduct our mortgage interest at tax time, and our public policy does not encourage home ownership for lower-income or less credit-worthy borrowers, to name a few. Is that enough to keep us out of trouble?
I’m not going to try to tell you what to think about all of this — instead, I’m going to ask you to tell me. Do you think mortgage debt is as much to blame as consumer debt for our economic woes? Would you take a 30-year mortgage? Drop us a note and we’ll offer some of your opinions in a future column.Google+