Spreading your mortgage repayments over a long period of time is not a good idea

To make home ownership possible, Justin Trudeau’s government has just relaxed some mortgage conditions, to the delight of lenders and bankers. But this mortgage discount is causing a lot of concern for the Bank of Canada because of the financial risks it represents.

What new mortgage breaks did the Trudeau government put in place?

Firstly, it now allows buyers of a first property or co-ownership to spread the amortization of their mortgage loan over 30 years, or 5 years more than before.

Secondly, from December 15, the 30-year mortgage release will also be available to new property buyers.

Third, also beginning in mid-December, the premium ceiling for mortgages insured by CMHC or other mortgage insurers will increase to $1.5 million, $500,000 more than it is now. When the down payment is less than 20% of the purchase price of the property, the mortgage must be insured.

THE CHRISTIAN SALVATION

In a previous column, I explained the difference between a $400,000 mortgage amortized over 30 years and a mortgage amortized over 25 years. In the case of a mortgage loan issued at an average interest rate of 5%, this reduced the monthly payment by approximately $191, from $2,326 to $2,135.

This allowed the borrower to benefit from an 8% reduction in monthly payments, or $2,292 per year. At first glance, let’s agree that it is attractive.

But be careful, this five-year extension has a significant cost of depreciation. In our example, reducing monthly mortgage payments will ultimately result in an additional interest bill of $70,589.

In fact, back after 30 years, the $400,000 property will have cost the astronomical sum of $368,515 in interest costs, compared to $297,926 in interest costs if the loan was amortized over 25 years.

According to Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, we can’t have it both ways. She says that taking steps to reduce the cost of short-term mortgages increases the long-term cost to borrowers.

“While long repayment periods and low payments increase borrowers’ returns,” she explains, “they increase the risk that both the lender and the borrower are taking.” to it because they reduce flexibility in case of problems on the part of the borrower.

To manage this risk, lenders, placing M^me Rogers then incurs higher costs, and borrowers often pay the price in the form of higher interest rates.

THE MORTGAGE GOVERNMENT WAR

Mortgage insurance, which lenders must take out when the down payment is less than 20% of the property’s value, does not protect the borrower. Mortgage loan insurance protects the banking institution if the borrower defaults.

The government’s minimum payment requirements for obtaining a mortgage loan are as follows: 5% on the portion of the purchase price up to $500,000 and 10% on the portion of the purchase price between $500,000 and 000 and $1.5 million.

Mortgage insurance is expensive for the borrower. Based on the size of the loan in relation to the value of the property, the price of the loan amount insured by CMHC will be as follows:

• 2.80% for a loan ranging from 80 to 85% of the value;
• 3.10% for a different loan from 85 to 90% of value;
• 4.00% for a loan covering 90 to 95% of the value.

In the case of a mortgage loan of $400,000, the price of the insurance changes by $11,200 if the down payment is between 15 and 20%; $12,400 if the down payment varies from 10 to 15%; and $16,000 if the down payment is only 5 to 10%. Given the amount of insurance premium to be paid, lenders usually add the cost of this premium to their mortgage loan.

THE MUSIC MAN WITH THE STICK

The federal government alone, says Carolyn Rogers, currently guarantees a whopping $590 billion worth of mortgage debt, a quarter of Canada’s total mortgage debt of $2.4 trillion.

Another threat on the horizon. The wave of mortgage renewals is also worrying the Bank of Canada.

According to Mr.^me Rogers, more than four million mortgage loans, or about 60% of those outstanding, will be renewed within two years.

Even though interest rates have started to fall following the Bank of Canada’s prime rate cut, most of these borrowers will see their monthly mortgage payments rise significantly.

Consequences? “Families could limit their spending more than expected to compensate for the increase in their payments, which would slow down the economy,” said Mr.^me Rogers. “This increase in payments could also cause financial hardship for borrowers and even losses for lenders and mortgage insurers.”

In addition, an increase in losses in the mortgage market could put pressure on Canada’s overall liquidity and financial stability.

Another national risk: since mortgage insurance in Canada is guaranteed by the federal government, there could be budgetary consequences if losses on mortgage loans are significant.