When Justin Trudeau appeared this week on The Late Show with Stephen Colbert, he conceded that the Canadian housing crisis was a “little sharper” than the one in America. By that, the prime minister didn’t mean it was more fashion-forward or stylish.
Nor, for that matter, should his government’s latest measures to ease the burden for struggling homebuyers be envied as chic or smart. Just when we should be reflecting on the lessons for our personal finances of sustained and increased interest rates, the federal government has gone and let out the leash.
Starting in mid-December the entry point for buyers is made easier by extending mortgage amortization limits to 30 years from 25 years for both first-time homebuyers on all homes and for all buyers of new builds. (To date, a 30-year amortization was available only to first-time buyers on new builds, like condominiums.)
Additionally, the mortgage loan insurance limit from the Canadian Mortgage and Housing Corp. (CMHC) will now cover homes costing up to $1.5 million, up from the current $1 million limit. To date homebuyers would need a 20-per-cent down payment on home costing more than $1 million; now they’ll just need a five-per-cent down payment on those $1-1.5 million homes to be insured by CMHC and not have to seek alternative insurance.
The political calculation on this as an election approaches and as housing affordability serves as prime concern is to make homebuying more financially feasible. The open question is whether the modest monthly savings are worth the more significant eventual costs. And given these new measures are arriving as economic indices weaken, it’s hard to call this a good deed or a good policy—unless you’re a realtor or a builder.
It is true that economics can sometimes seem baffling and contradictory. Inflation, for instance, seems bad for most everyone, but it usually signals a red-hot economy where more people are making more money. When inflation subsides, you’d think it’d be a good sign, but it usually signals (as it does now) a general slowdown in the economy.
The economics of homebuying have their own inherent contradictions. And in the latest case of trying to more generously provide short-term opportunities for first-time homebuyers of new builds, the federal government has actually made it more burdensome overall. Immediacy eventually becomes impact, and not in a good way, because several unintended consequences are likely in this trade-off for a lower monthly payment.
The clearest impact involves higher total interest payments over the 30-year period. The lower monthly payments shroud an actual increase in the eventual cost of the purchase, and along the way less equity is built – which in turn affects your flexibility for other investments or finances. ​
For example, a $500,000 mortgage at four per cent interest over a 30-year amortization would save you about $248 a month in payments over a 25-year amortization, but the total interest paid over the 30 years would be more than $67,500—to be exact, $359,347, compared to $291,75. (Bear in mind this example is charitable, considering the interest rate fluctuations of the last three decades. The average has been roughly between four and six per cent.)
There is an important perception that emerges in our behaviours when it is possible to stretch the amortization of a mortgage. With the higher insurance threshold (and higher CMHC fees along the way, it should be noted) and a lower monthly mortgage payment, you begin to think you can “afford” a higher-priced home— and that, unintentionally, can also push up prices in a market like ours, which of course might make it harder to enter the market.
It can also tempt you into spending up to your financial limit, and leave you vulnerable to defaulting in the event of job loss—or, if it’s a variable rate mortgage, to a rise in the interest rate on the loan. Today’s downward trend, we should recall, followed a years-long steady increase to subdue the inflation dragon.
Naturally, no one wants to keep paying a mortgage indefinitely, but those extra five years in a 30-year mortgage might take you into your retirement, when you have far less financial flexibility and generally more healthcare costs.
And, not to be what former prime minister Jean Chrétien called a nervous Nelly, but heaven forbid there is a market downturn to couple with this, because that’s when you could owe more on a mortgage than the value of the home. To be fair, we’ve been hearing for two decades now about a pending housing market crash, so let’s take that fear off the list. The other ones stand.
Kirk LaPointe is a Glacier Media columnist with an extensive background in journalism.
