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40-Year Mortgage Risk

40-year-amortization Scotiabank released a report today saying 40-year amortizations are “changing the longer-term risk dynamics” of Canada’s mortgage market. (Financial Post story)

Three out of four insured applications are now for 30 to 40-year amortizations, says Scotia. 

40-year amortizations comprise 1/2 of that total. (Don’t be surprised if this 1/2 grows to 3/4+ over time.)  Prior to 2006, 25-year “ams.” were the standard for decades.

According to the Financial Post, Scotia’s Derek Holt (the report’s author) cites some potential risks of this trend:

  1. If homeowners someday start paying off their 40-year mortgages sooner, and en masse, it could heighten [prepayment] risk to buyers of mortgage-backed securities containing these mortgages. That could in turn cause problems for mortgage originators.
  2. If people become highly leveraged using 40-year amortizations, and the economy goes in the dumper, the repercussions to our housing market could be material.

We have no stats to back this up but most people seem to be getting 40-year ams. because they need them (to get the home they want).  If wages sink and unemployment spikes, you have to wonder how many 40-year mortgagors might be living too close to the edge to keep up their house payments.

On the other hand, given the quality underwriting standards we see day in and day out, it’s difficult to foresee anything akin to a U.S.-style collapse heading Canada’s way.  Long-term though, Holt says nobody knows what the effect of 40-year ams. will be.

We’ll try to get our hands on Scotia’s full report and follow up on this story shortly.