The 40-Year Rush

40-year-amortization-rush On October 15, 2008, barring any surprises, there will be no more lenders offering insured mortgages with 40-year amortizations or no money down.  (See previous story)

It’s therefore not a stretch to expect a rush of mortgage applications leading up to this date.

The rush will likely be greatest in cities where 40-year borrowers congregate due to high prices (e.g.  Calgary, Vancouver, Toronto).

Invis’s, Gary Siegle, says, “The word is out and as long as lenders are continuing to offer 40-year amortizations until October, you’re going to see probably a rush into the marketplace.”  He says 40-year ams are “definitely much more popular in the higher-priced markets because it’s really the only way people can qualify.”

The Mortgage Centre’s, John Panagakos, agrees and says, “I am very sure there will be a rush of buyers and brokers and lenders rushing to get in before the deadline.”

Siegle estimates half of Invis’s Calgary clients in the last year chose 40-years, and zero-down mortgages were almost as popular.

Quotes via:  Globe & Mail, Calgary Herald

  1. I fully agree. The 40 year is for many people the only way they can afford a home of their own. And as was said, especially in Toronto and Vancouver. Toronto is not as bad as Vancouver though. The prices here are rising at little bit lower pace than Vancouver. As a realtor in Toronto, I am already in a rush with some of my clients trying to beat the deadline. I am just surprised that no one has found a way to abuse this, yet.
    We`ll see what the future brings.
    Julie

  2. Julie, 40 year mortgages are a joke and you should be ashamed for putting your clients into homes they can not really afford. If someone truly needs a 40 year mortgage, they shouldn’t be buying, they should be renting. The money they save on renting could be used toward a future downpayment.
    If people would refuse to buy homes at their current over-inflated prices, prices would eventually fall and those that had saved up down-payments could actually afford to buy on traditional terms.
    But I guess financial prudence is a thing of the past. Even the Central Bank of Canada has followed the path of the Fed and is taking worthless securities onto it’s balance sheet.
    What a mess…none of this would have happened if people weren’t sheep so susceptible to the realtor spin “Buy now, buy now, don’t throw your money away on rent” (but instead throw it away on mortgage interest and an over-valued asset). But realtors shouldn’t be solely to blame, the government should be enforcing MUCH stricter lending rules….let’s move to 10% down and 30 year terms by next year, and 20% down, 25 year terms within 2-3 years. Let’s get some sanity back people!
    Booms and busts are not the way to do things….slow contained growth is the way to go.

  3. What really is the difference between 35 years and 40 years in terms of monthly payments? According to the RBC mortgage calculator, let’s take a look: Well on a 350,000 mortgage, say at 6% interest, a 40 year mortgage would have monthly payments of about $1907. A 35 year term works out to $1978 a month. So we are talking a difference of $71 a month.
    Quote from Julie: “I fully agree. The 40 year is for many people the only way they can afford a home of their own.”
    Julie, so are you telling me that the clients that you are rushing into these 40 year mortgages cannot afford the extra $71 a month that would be required if they close after Oct 15th? If that is true, isn’t it obvious to anyone with a 2nd grade education that such people don’t have the proper financial footing to be entering such a contract? If $71 a month is a deciding factor in their decision, how the hell can they plan for any emergency spending such as car repairs, vet bills, home repairs, lost job, etc.
    How, in good faith, can you knowingly sign people up for a contract that is going to ruin their lives if even the slightest financial misstep happens? Well the fashionable answer we know is that “home prices always go up so even if they can’t make the payment, they can just sell their house at profit”. haha, what a joke.

  4. Toronto Bear: You must fancy yourself to be quite an expert on home financing to comment so strongly against a random person on a news clip on a mortgage website. You have inspired me to do the same.
    I have a 40 year mortgage because it was the only way for me to afford a house that was too good a price to pass up – I did not get “spun” or “rushed” into it by a realtor because I bought privately.
    The Industry I work in provides me with quarterly royalties which I can now use for reducing the principle on the mortgage. The job also has a continuous raise in salary and chances for promotion and since I have only been here a year, the salary will only go up. This means I can re-neg the terms of the mortgage and get out of the 40-year plan and into something more reasonable when I have the means to do so.
    The point of this is that 40 year mortgages are not a “joke”. I think it would be silly to stay in one for the full 40 years if you have the means to renegotiate into one with a shorter amortization period, but there are some people who can really benefit from the low monthly payments. So give Julie a break, it was just a comment on a tiny little news story.

  5. Hey East Coast kid,
    What about us people in the market when ZERO down was a pipe dream a few short years ago. We actually had to “save” for a down payment unlike 40% the new home owners today. It’s a joke FOR SURE. Now us people who have built equity in our homes( who want to eventually upgrade) are priced out of the market do to ridiculous price wars between all the 0/40 crowd.

  6. East Coaster,
    Congratulations for you and your eternal optimism that your salary will only ever go up and that you, unlike the rest of your fellow citizens, have 100% job security. Must be a nice world you inhabit, but the reality is the economy is going into a recession and job security is not something everyone should take for granted. True it’s not possible to plan out for every contingency and to worry needlessly about the future is also counterproductive. Back to your situation….are you really trying to tell me that $100 or so a month difference is going to make or break your ability to make your monthly payments in the absence of your quarterly royalties?? I would suggest that an alternative approach would have been to save up a considerable nest egg with some of those quarterly royalties and used them to increase your down payment and reduce your mortgage term.
    I don’t know if you fell into the whole zero-down, “Leon’s don’t-pay-a-cent-event” crowd that adhere to the instant gratification policy of life. However this type of lifestyle is extremely prevelent in our society and I would argue that it is the route of all the massive problems that have caused the global credit crunch.
    All that aside, I think you missed the point of my post. Julie is talking about people that COULD NOT AFFORD a home unless they were on 40 year mortgages. As compared to a 35 yr mortgage on an average house, that is about $75 a month!!!!!!!!! Say what you like about extenuating circumstances and quarterly royalties but if someone can’t squeeze in an extra $75 a month for a home payment, they really have no business being in that home in the first place. Most first-time buyers are in their mid-30’s, and with a 40 year mortgage, that puts them paying off their house in their mid 70’s….so with mandatory retirement often ocurring at 65, how do you propose they pay off their mortgage in later years? People with 40 year mortgages and zero down are just renters in disguise.
    One more thing…say what you will about not being “rushed” into a house. The fact is by your comment you are a sheep and you don’t even know it. When I was referring to realtors, i wasn’t trying to blame it on the specific realtor conducting the transaction. I am talking about the RE industry on the whole. Those that pay massive amounts of advertising to the nations newspapers and thus have a huge influence on the types of articles that appear in mainstream media. If in fact you “needed” a 40 year mortgage on a home, then let me tell you something…the price actually was not too good to pass up.

  7. Price Out
    Great comment about the bidding wars with the 0/40 crowd!! You can guarantee that when lending standards required a hefty down payment, bidding wars were probably non-existent. Who really has $100,000 or more to put as a downpayment these days in Toronto? My guess is not very many.

  8. Hey T Bear,
    thank you. Thank god we came to our senses and got out of that artificially inflated market (Winnipeg) when we did. After we put an offer down that had 17 competing offers(and went for 45k over asking), we said enough is enough. Time to wait this thing out. We were no match for all the “cheap” money that was out there.
    The growth rate of income vs housing so out of whack it’s crazy.

  9. 0/40 did have a place in the market for ‘specific’ borrowers. Shame on the big greedy banks for offering these products to anyone with a pulse!

  10. Priced out,
    Doesn’t this mean that you in fact benefited substantially from the 40/0?
    Didn’t it produce a windfall appreciation in your house?
    And didn’t you then cash out near the peak, and now will benefit when the market theoritically contracts after the 40/0 is removed?
    TorontoBear, methinks you do protest too much.

  11. Here’s a good article about why 40 year amortizations does not necessarily mean a 40 year mortgage. http://www.genworth.ca/mi/eng/downloads/HT_April_2008.pdf
    I agree 40 years are not for everyone, but they do have their place in certain circumstances. It’s our job as brokers to break down a client’s financial situation, work out a budget, and find out if a 40 year is a good idea, or not.

  12. I doubt there is going to be a rush at all. Who can ignore the mainstream media now? By the time October rolls around, no one is going to be saying “oh emm gee, we’d better get us one of those so we don’t get priced out!”. Everyone is going to be saying “uhhhh… why would we want to buy now? It’ll be cheaper in 3 months.”
    I call BS on this mortgage rush. If the lenders actually expected a rush, they would still be offering the 40 year option until October, rather than jumping on the new regulation as soon as they can, which as I understand, most are.

  13. Dave,
    A windfall? Cash what out? How does that work? I sell my starter home which is overvalued for an upgraded home which is also over valued by at least the same percentage(actually more since the range I wanted to upgrade too was waaaay more competitive in this fake market). Tell me where I win in this scenario. I’d love to know.

  14. Hi T-Bear,
    I am very greatful to have the sort of job security/situation that I have and luckily this meant that I was able to buy a house in a situation that was tight on timing (also: did not choose the instant gratification route – this meant that my down payment [Priced Out] helped quite a bit but I still went 40 years because I did take into account other expenses and it still ended up being the right fit at the time unfortunately) I saw a friend do the 0/40 thing last year and tried my best to stay away from it.
    I was merely using my personal (and i realize, fairly unique) situation as an example for the use of such a long amortization period. Believe me I am in no way pleased to be giving the bank so much money in interest. The choice may seem irresponsible on the surface but in reality was a good fit given these specific circumstances.
    If I missed the essence of your original post (T-Bear) I apologize. The point may have been dulled by a general sense of arrogance (observing the tone of the post(s) but trying not to judge you as a person)
    – You may have also missed the point of my original post: It is frustrating to be an Idealist sometimes but if people don’t agree with these ideals, I don’t think that validates cutting people up to make yourself look big and smart. You can’t always have it your way.

  15. Womp – People on the bubble will read the papers and say to themselves, “we have 2-3 months left to buy with no down payment and lower monthly payments”
    There will most definitely be some kind of rush, especially with the press this will get near October.
    Upwards of 40% of mortgages are for 40 years and/or with no down payments. This is a huge percentage of the Canadian population.

  16. Priced Out,
    You had stated that you had withdrawn from the market, so I thought you had sold.
    But it’s not too late. Sell your overvalued starter home now, while it is still overvalued because of the 40/0. (as you claim)
    Buy a upgrade after the 40/0 expires, which will then be much less overpriced. You will have a advantage against those who struggle to raise the 5% down.
    To recap:
    You bought your home back in the days of 10% down? So you’ve ridden the RE bull market for the past 4-8 years? Shouldn’t you have nearly 50% equity in the new “overinflated” value of your starter house? I don’t see the problem.

  17. East Coaster,
    Many of your points are well taken. I’m not trying to suggest that 40 year terms are bad for everyone, but the problem is they have been badly abused. When I hear Canadian RE pundits saying that “we have no subprime here” the ignorance makes me cringe.
    I have been following the housing market on a daily basis in the US and Canada for about 3 years now, and perhaps my frustration is peaking so when I read comments by people like Julie who are talking about rushing clients who presumably have no business owning a home into 40 yr terms before the deadline….it makes me irate. Furthermore, she has the nerve to ADVERTISE herself by posting her website as well. I’m not trying to say she is a bad person, but she is part of the overall problem which is the national obsession of home ownership and national delusion of never ending home price appreciation (inflation). This obsession results in the situation we are in now….exotic and dangerous lending practices required to put marginal borrowers into houses that have no business owning in the first place.
    Dave, are you the same dave from the nvhomes blog?

  18. OK T-Bear now that makes much more sense – I also agree with you on the advertising – and agree that you have legitimate reason to be irate when you put the situation in that light – and also since you (i’m assuming) make a living in the same industry as her. If people are rushing ppl into those kinds of deals theres no way it can be good in the long run. If I had read your last comment first I would not have even bothered to post (although it was fun haha).

  19. Nope.
    I googled that blog, and went looking for his postings, expecting him to be a gibbering itiot (hence your question). But apart from a sunny view of vancouver real estate, he seems normal enough.
    Why the question?
    ps. I’m in Toronto.

  20. East Coaster,
    Glad I could provide a better framework. Btw, I am not in the RE business…just a guy who struggled for a few years to pay off student debt and am now socking away money for what I’d hoped for would be a downpayment on a reasonably nice place.
    Dave,
    That Dave guy on the nvhomes guy is an articulate optimist who can take a lickin’ and keep on tickin’. I give him kudos for that. I just assumed you were a housing bull so thought maybe…
    I am from Toronto too, btw.

    So when I started educating myself on the housing market, I would liken it to shaving off the wool that had grown thick over my eyes. I too was one of the sheep. During my research I quickly discovered that the price to own compared to renting was absurd. Many of my friends who make far less money than I do were all jumping into 400-500k homes and condos and I just wondered HOW? I found out about the whole 0/40 thing. And I also wondered WHY? They had pressure from friends and family to stop “wasting money on rent” and were encouraged to “build equity”. Make no mistake, the Real Estate industry is a huge force with extensive lobbying resources…their mantra has pervaded our daily lives through manipulation of the mainstream media. It’s why I seek information out from non-convention sources such as the blogosphere. In my experience, people in the blogs tend to be less prone to manipulation than the average joe and more likely to seek out the truth for themselves. Occassionaly you get the commision-seeking agents polluting the boards with ads and standard rhetoric. (There are many exceptions such as Rob who does a great job on this site presenting unbiased facts, and Paul who runs the nvhomes blog).
    Based on historical standards (not current loose standards) my family combined income should allow me qualify for a mortgage of about 500k, but factoring out my wife’s income (in case she wants to take time off to raise kids) to be safe means a more realistic upper mortgage limit is 300k. I’d rather save up at least 50-100k and take a mortgage of no more than 200k, truth be told. But still, 300k gets you nothing worthy of raising a family in Toronto. Unless you want to raise your family in a cookie-cutter condo in hookerville at Landsowne and Bloor. When you are in the top 10% of wages, but can’t afford even a sub-standard home, you know there is a problem. Or maybe it’s just my definition of being able to afford something is much different than Julie Kinnear’s definition.
    Cheers,
    TB

  21. Too bad the days of people living within there means are gone, do you need a $500k for your first home–get a townhouse or a condo. The broker community at large has done a poor job at pushing the 40 year amm and 100% ltv products. Many of these are 1st time home buyers, rental properties (stated of course as being owner occupied). I guess client’s will have to go back to being coached to take the 5% from the visa and showing that as being the downpayment.

  22. And by the way, 40 year amms were not around 1.5 years ago, what happened then? 100% ltv has been around 3-4 years, broker propoganda is tiring, the sky is not falling, when these products leave the market place, here’s a thought, how about the broker antes up his/her own money and do a 2nd to 100% ltv? Do you think so, NEVER would brokers do that, so please stop the noise.

  23. John what’s your angle?
    “The broker community at large has done a poor job at pushing the 40 year amm and 100% ltv products.”
    “broker propoganda is tiring”
    Do you work for a bank?
    Brokers didn’t create 40yr ams and 100% financing. Insurers, banks and other lenders did.
    Nor do most of us give a hoot if borrowers get them. We get paid close to the same either way. Yes the mortgage amount is bigger with a 40/0 mortgage, but not enough to throw a party over. Mortgage brokers are in business to advise people and generally do so very honestly.
    Know the truth before you post public comments like this.

  24. My angle is-too many brokers think the sky is falling–as for brokers doing things honestly that is in some cases true, many it is not and as we all know CAAMP is just a propoganda machine no different that the NRA, Tobacco Lobbyist group–any it that group that wanted the 40/0 product–which represents the mortgage brokers-, too bad they did not focus enough on fraud and blacklisting brokers from the industry–AMP designation is a joke–many fraudulent brokers have the AMP and frankly as long as you show up for the ethics cours–i.e pay for the course it’s your to have-is that enough angle for you?

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