With the federal election looming on September 20, the NDP have proposed reintroducing a 30-year amortization on high-ratio mortgages, but the president of Mortgage Architects has an even more radical idea.
“Personally, I was lobbying for a 50-year amortization for first-time homebuyers, if you want to stimulate the economy and get young homebuyers into the market, even though they will still have to qualify under the same standard,” said Dustan Woodhouse. “Another reason is we have a principal paydown problem in Canada, and that means too much of people’s mortgage payments go towards paying the principal.”
In 1995, an average of six cents on every dollar went towards paying mortgage principals because of how high interest was, and today it’s surged to $0.66. Although that might not sound like a bad thing, Woodhouse says that people in their 20s and 30s are still accruing assets and shouldn’t have to spend so much of their incomes on paying mortgage debt.
“It’s great people are getting out of debt at that pace, but they don’t have to when they’re 25 or 30 years old. They can take an extra five years to pay off a mortgage, and it’s not a big deal because it frees up an extra couple of hundred bucks or so a month so they can buy a new couch or upgrade their car sooner. Most of us spend our 20s and 30s accumulating the fundamental basics of life, while people in their 60s and 70s are getting rid of that stuff,” said Woodhouse.
“When you’re in your 20s and 30s buying your first condo or townhouse and trying to work your way up property ladder, you could use a little bit of extra cash, which goes into the general economy and then boosts the overall economy, and that’s really important to a lot of economists out there and to the federal government. Stability in the housing market matters but giving people an extra five or 10 years to amortize their mortgage just makes sense.”
However, according to Shawn Stillman, principal of Mortgage Outlet, a 30-year amortization on high-ratio mortgages wouldn’t solve the issues surrounding housing affordability, which the NDP is putatively trying to do with its proposal. For starters, housing supply isn’t commensurately increasing with demand, and Stillman says that’s the crux of Canada’s housing crisis.
“We’ve had a massive amount of immigration to Canada and the housing stock hasn’t kept up,” he said. “Nobody ever wants to say this but you can’t increase demand without looking at supply, and no one will ever want to say that we should cut down immigration because they will be deemed to be a racist or discriminatory, but no matter what happens, even if you did a 30-year amortization, in reality it will make no change on affordability because prices will just keep going up.”
Laura Martin, COO of Matrix Mortgage Global, disagrees with Stillman’s assessment and says that the real barrier to enter a high-ratio mortgage has always been income qualification. While not wholly a panacea, stretching the amortization by five years would alleviate some pressure on homebuyers, she says.
“Using immigration as a scapegoat for the lack of affordability totally fails to account for how and why prices skyrocketed while the borders were closed, not to mention overlooking the fact that the overwhelming majority of immigrants admitted to Canada who are not from the U.S. or U.K. are working in low-to-medium paying jobs like manufacturing, healthcare, elderly care, retail and so forth,” she said.
Martin says that on a $600,000 mortgage at 2.5% interest with a 30-year amortization, the monthly payment is $2,366.70, which can be supported by a $96,000 annual income at a 35% gross debt service (GDS) threshold. That same mortgage on a 25-year amortization, however, would require an annual income of $108,000 to reach 35% GDS.
“Raising the amortization to 30 years, as it has been for decades before, will help both new Canadians and citizens become homeowners,” said Martin.
On the question of solving Canada’s housing crisis, Stillman is even more critical of the NDP’s proposal to raise the minimum wage to $20 because it will trigger higher inflation and, by extension, housing prices.
“When you increase the minimum wage, every other wage goes up along with it,” he said. “If you bring it to $20, inflation will go up. Everybody moves up. Socialism is a beautiful theory but in reality it doesn’t work. If you artificially raise the floor, everything else rises too. Nobody in Canada buys homes for anything less than within 5-10% of their maximum affordability, so this will cause more housing price inflation. Those same people who get 25-year amortizations buying the maximum house they can afford would be able to do a 30-year amortization and they’ll all be fighting over the same housing, and prices will rise to match that.”