More people than ever are getting mortgages with long-term amortizations and it has big implications according to RBC.
For one thing, it’s making Canadians less sensitive to rate hikes. If rates jumped 1%, for example, RBC says a borrower could simply increase their amortization from 25 to 33 years to offset the impact. (Mind you, while their payments would remain similar, their interest paid would soar.)
Secondly, long-term amortizations appear to be driving up home prices. We’ve been suspecting this for months, and now RBC has finally confirmed it by noting that “longer amortizations are contributing to upward price pressures…” This has been David Dodge’s fear ever since CMHC launched long-term amortization products last summer.
You didn’t have to be a fortune teller, though, to foresee all this. If people are able to finance pricier houses they will probably buy pricier houses!
The moral is, innovative mortgage products are a powerful new force residential financing. They will probably fuel Canada’s real estate engine for a while to come–at least until there is no one left to “buy higher.”
Last modified: April 25, 2014
Just a quick point for clarification.
In their report, RBC says you can move to a 33-year amortizaton to offset the effects of rising rates.
In fact, you have to set your amortization at the time you get your mortgage. You can’t do it in mid-stream if rates rise. That was a little vague in the story.
Have a great weekend everyone!
CMT