TD CEO Supports 25-year Amortization Maximum

Ed-Clark-TDTD Bank CEO, Ed Clark, says the government should cut the maximum mortgage amortization from 35 years to 25 years. (FP Story)

“We see a world in which low interest rates and excess liquidity has created asset bubbles all over the world,” Clark told reporters last week.

“We don’t have a problem here, but why are we not making sure we don’t create a problem?”

Clark says Canadians have been following a policy of: “Don’t save. Take a longer period to spread out your payments.”

“I don’t think that’s good public policy,” Clark feels.

The idea of reducing amortizations has been floated before, most recently this year when it was speculated that the Finance Department might cut the maximum amortization to 25 years.

The government last changed amortizations two years ago. At that time, they were cut back from 40-years to 35-years on high-ratio mortgages.

Despite all the debate, no one has ever provided public data (that we’re aware of) to show that 35-year amortizations create undue risk in the market. Insurers charge just a 0.40% higher premium on a 35-year amortization. That means something, because insurers are actuarial experts. They know default ratios better than anyone in Canada. None of them have indicated any public concern for extended ams.

Restricting choices for intelligent highly-qualified Canadian borrowers doesn’t make much sense. (See: Extended amortizations do have a place.) People with great credit and solid employment need the right to manage their cash-flow without government intervention (within reason of course). So do highly qualified borrowers in high-priced locations, or those buying investment properties.

In almost all cases, people who take 35-year amortizations plan to pay off their mortgage much quicker. In fact, the average Canadian gets rid of their mortgage in 1/2 to 2/3 of their original amortization, according to insurer sources. In other words, due to pre-payments, people pay off their 35-year mortgages in far less than 35 years.


Robert McLister, CMT

  1. > people pay off their 35-year mortgages in far less than 35 years
    You can’t draw this conclusion. Just because many will doesn’t mean all will. For those that don’t, it’s hard to see the benefit of less retirement savings thanks to all that extra interest paid and increased odds of a mortgage past age 65.
    > That means something, because insurers are actuarial experts.
    But not much since CMHC is a political tool. Plus we shouldn’t have too much faith in insurers ability to price or manage risk after the AIG fiasco.

  2. “For those that don’t, it’s hard to see the benefit of less retirement savings thanks to all that extra interest paid and increased odds of a mortgage past age 65.”
    *You* don’t have to see the benefit. The homeowner is the one to make the decision, and he/she wouldn’t be opting to go with an extended amortization if they didn’t judge that the benefits outweigh the costs. Very paternalistic to think otherwise.
    Also a little hard to stomach Ed Clark’s financial advice. People making $10.4M/yr (http://bit.ly/9pj321) don’t have to weigh these kinds of decisions. If I needed an opinion on the bouquet of a Chateau Mouton Rothschild 1982, however, I’d definitely give him a call.

  3. Al R is absolutely right – regarding the Clark making decisions when his salary $10M +
    I have a better idea, lets lobby to have the government remove the IRD, and only allow banks to charge a 3 month penalty, and lets see how competitive they really are.
    See how Clarky likes it when his cash flow is affected.

  4. I wonder if Mr. Clark is aware that his bank now encourages borrowers to register a TD mortgage charge of 125% of the current value of their home on title?
    The benefit, customers are told, is that it will be even easier for them to borrow more money from TD when their home increases in value in future.
    Forgive my bluntness Ed, but you can’t suck and blow at the same time. If you think Canadians have a debt problem then maybe you should stop exacerbating it!

  5. I am an actuary (although not for the CMHC, but rather in the private sector). My profession is filled with very, very smart people, but they have their blindspots. Actuaries base their calculations upon data from the past. And they presume the data follows a quantifiable distribution pattern (typically a “normal distributation” aka the bell curve).
    The problem develops when the past is not an accurate indicator of the future. Or when the data does not extend far enough into the past to accurately track what took place. Consider the situation of the US, where their models did not take into account the possibility of a nationwide price reduction (because it had not happened since the great depression).
    Another unfortunate reality of life in financial reporting (for actuaries and accountants) is that sometimes there are “practical considerations” (aka politics, shareholder expectations, etc) which influence the variables one chooses for your calculations.
    For those of you who are now filled with indignation about the prior paragraph, please understand that ultimately the “demon” is all of us and our own expectations and perceptions of entitlements. We are the shareholders (via private investments, RRSP’s etc), and similarly we are the originating source of political pressure in a democracy.

  6. Getting rid of IRD would be silly. Banks can’t break mortgage contracts, so they need a reasonable penalty for when the clients do.
    As for lowering 35 to 25, it is hard to say the insurers know much when the service has been around so few years, and in such unusual rate circumstances. Anything that encourages Canadians to pay down debt more quickly is a good thing for the economy as a whole.

  7. When housing is unaffordable, extra credit is an arms race unfortunately. If everyone gets it they all get the same result but with a much larger mortgage. There is nothing wrong with renting until you’ve saved up enough to afford what you want.
    Of course I am a shareholder in the banks that profit from this like many others, and I’m also likely buying in the next month, but I’ll feel a lot more confident in the economy if banks profit from mortgages a bit less and prices slide down over the next few years.

  8. ‘the “demon” is all of us and our own expectations and perceptions of entitlements’
    The problem in a nutshell; but, what is the solution?

  9. So true about ppl in higher social economic classes weighing in on matters they know absolutely nothing about. The reporter at the FP would add credibility to the story if they had first asked Ed how much a jug of milk costs, a 12 pk. of beer or the average time it takes to see a family doctor at a walk-in clinic when you don’t pay to have your own private physician?
    For a balanced report, maybe next time the FP reporters could interview the homeless about mortgage issues.

  10. I think we need resolute political leadership that is not afraid to piss people off.
    The problem is that modern democracy is the tyranny of the uneducated and easily manipulated majority. It is hairstyles and soundbites. Nobody gets elected, nor stays elected, by speaking unpleasant truths.

  11. “Despite all the debate, no one has ever provided public data (that we’re aware of) to show that 35-year amortizations create undue risk in the market.”
    Really? It seems fairly obvious to me. The longer the amortization, the less the monthly payment. The less the monthly payment, the more house you can afford. The more people you get doing this, the more the cost of housing goes up for everyone. The higher the cost of housing, the more financially stretched people are to afford to buy their homes… which creates a circular need to throw out even longer amortizations, government guarantees and incentives as the cost of housing goes ever higher(see brief 40-year amort foray to see the results of this). In the absence of significantly higher incomes that are in-line with significantly higher housing costs, the more financially vulnerable people get when hit by an economic shock (such as unemployment or increased interest rates, for example).
    I don’t mean to be pedantic, as I know you’re all a highly intelligent bunch, but am I misperceiving what the risk issue actually is here?

  12. David you’re so right. This is political posturing at it’s finest. I guess you can borrow your life away once you own your home, but you shouldn’t get a 35 year amortization to purchase it?? LOL

  13. “In fact, the average Canadian gets rid of their mortgage in 1/2 to 2/3 of their original amortization, according to insurer sources. In other words, due to pre-payments, people pay off their 35-year mortgages in far less than 35 years.”
    As I read the first sentence, I presume that must surely be based upon 25 yr amortizations, and ones that were originally placed 1960-1995? Otherwise, we wouldn’t have the 15 years necessary for 2/3s of the original amortization period.
    But the ability of people to pay down their principal was markedly higher in the past, because the price to income ratio was between 3-3.5 to one during that period.
    Now, we have a price to income ratio of 5 to one, albeit with lower mortgage rates which makes the interest burden the same or lower.
    So I’m not sure that the pre-payment experience of the past can be reasonably used to model future experience.
    Finally, I note that the 35 yr amortizations only came into effect in 2006. So whether or not the prepayment experience on 25 yr mortgages (from 30 yrs prior) is a reliable indicator? I don’t know. I’m not saying it is apples to oranges, but at the least they are two different types of apples.

  14. Your speaking from the gut viewpoint is flawed since it is not backed up by any credible data and fails to include any of the positives that come from RE appreciation or options like 35 yr amorts. Getting people into real estate sooner than they would otherwise presents a huge opportunity for long time renters to no longer be slaves to landlords. Overall, that is a wonderful thing in the free market system.
    The Cdn. Bankers Assoc.(cba.ca) puts out monthly stats that show mortgage arrears in 2010 peaked at the beginning of the year at 0.45% (sept10=0.42%) which statistically is a lower default rate of mortgage arrears than at anytime during the 1990’s. This despite the past decade having significant housing price appreciation and correction, zero down’s, 40yr. amorts and a recession to name a few.
    The fact remains, political stability, strong capital markets, low inflation/interest rates, economic growth and a healthy job market to name a few is what drives the real estate market.

  15. Hi wjk: Thanks for the feedback. It’s a fact that the large majority of mortgagors pay off their mortgages in notably less time than their original amortizations. Some don’t of course, but then again, not everyone drives the speed limit either. That doesn’t mean the government should make careful drivers poke along at 70 k/hour on the Trans Canada highway.
    Rule-making comes down to cost-benefit. The government can make mortgages much harder to get for well-qualified deserving homeowners, but the cost is great and this penalizes responsible citizens. I don’t advocate letting unqualified borrowers take liberties with their mortgage, but a 700+ beacon borrower that meets all insurer and lender guidelines needs the ability to manage cash flow as they see fit.
    Many of the issues that led to the AIG fiasco and US market crash pertained to factors that are simply not present in Canada, namely: opaque securitization, widespread mortgage fraud, non-recourse loans, option-ARMS, etc. These are severe structural issues that caused a once-in-a-generation crisis.
    35-year amortizations are a totally different issue. Their ability to affect Canada’s real estate market is not even remotely comparable to those US risk factors above. Note: This is not to say Canada doesn’t have its own risk factors (it does), I’m just keeping on point regarding 35-year ams.
    Hi Dave: Great points. Default insurers are actuaries that assess risk and price accordingly. It’s a lot easier to do in a country with a transparent system (Canada) versus a country with latent risk (as was the case in the U.S.). Catastrophic risk is always the most vital part of any insurer’s model. In particular, stochastic modelling (forecasting losses based on random events) is a major part of setting premiums. In this country Canadian insurers are under intense federal scrutiny to account for unforeseen risk and they do their jobs well. Is there a chance their modelling of 35-year ams could be off? Of course. Is it extremely minute? Yes, and it is small enough not to penalize the huge majority of Canadian’s who are capable and responsible enough to manage their finances with extended amortizations. While they’re correlated with somewhat-higher defaults, 35-year amortizations are simply not a major risk factor by themselves.
    Hi Jmann: Long-term amortizations have been around for several years in other jurisdictions. If you travel through Europe you’ll find 99 year amortizations, and naturally you’ll find interest-only mortgages (which have infinite amortizations) both abroad and in Canada. Insurer models are based on well-established domestic and international data and analysis of random catastrophic events.
    That said, I’m in total agreement that Canadians should be encouraged to pay down debt as quickly as possible. But it’s important to allow carve-outs for highly-responsible borrowers and investors who have legitimate needs for maximizing their cash flow.
    Hi Richard: You’re absolutely right about renting being the best alternative for many. Although, it’s not our position to tell a strong borrower with only 5% down that he/she can’t buy a house because we don’t want home prices rising.
    Hi Jen: Given the major recession that North America just endured, it would also seem obvious that defaults would be materially greater than 0.46%. But they aren’t. What seems obvious often isn’t. The same is true with extended amortizations. There is no data we’ve seen to suggest 35-year amortizations create unreasonable default risk. The Finance Department, Bank of Canada, insurers and lenders all seem to agree.
    We have to remember; just because a borrower has a 35-year amortization doesn’t mean he/she can’t afford a mortgage. The borrower’s credit history, debt ratios, and employment are significantly more important in judging repayment ability. There are borrowers with 25-year amortizations that have a significantly higher probability of default than a 35-year borrower. In unforeseen economic shocks, the borrower’s debt coverage ratio and employment are far more important that his/her amortization.
    Hi dave: People’s propensity to repay their mortgages faster (be it with a 25-year or 40-year amortization) are well-established based on Canadian data (for 25-year amz) and international pre-payment patterns for longer-term ams. I recall a story we did with AIGUG who quoted 12-14 years as the typically repayment period on a 25-year am. They estimated 20 years for a 35-year am. I agree with you that it will take longer to repay mortgages if real estate prices and debt ratios keep rising at the pace they have. But a more weighty question is, how will people’s monthly debt ratios look as interest rates rise?
    Suffice it to say, I’d lend to a 750-Beacon 35-year borrower with a 40% debt ratio a lot faster than I’d lend to a 650-Beacon 25-year borrower with a 44% debt ratio and $20,000 of credit card debt. Lending is a case-by-case exercise and we have to be really careful about making national policies based on the tendencies of very small minority.
    Cheers,
    Rob

  16. Nobodys saying that 35 year amortizationsnshould be made illegal; just that the government shouldn’t cosign every loan at that amortization.
    If private lenders want to lend for 35 years or private insurers want to insure 35 year amortizations, all the power to them. But the Canadian government through CMHV should not be the one guaranteeing these loans.

  17. In a perfect world it would be wonderful if everyone had a 25 year amortization on their mortgage and paid it off within 15 years. I got my mortgage 21 years ago and would have paid it off by now if it weren’t for……. LIFE getting the way. One failed marriage, two lost jobs and one beautiful daughter later I will be paying off my mortgage when I am well into my 70’s.
    So… Ed… how’s your life been going lately? I’m guessing pretty good. So let’s leave your silly posturing for another time. Where were you when CMHC upped the amortortization period to 40 years. How many 40-year mortgages did TD/CT write before CMHC pulled the plug on that bonanza?
    I not sayin… I’m just sayin.

  18. @ Rob
    “There is no data we’ve seen to suggest 35-year amortizations create unreasonable default risk.”
    Of course not. 35-year amortizations were introduced in 2006, and the only shock to the market that did occur in 2008 was ameliorated by rock-bottom interest rates, which have not yet risen to any degree. The default risk has not yet occurred.
    “Given the major recession that North America just endured, it would also seem obvious that defaults would be materially greater than 0.46%.”
    No, it doesn’t seem obvious at all. Rates have not yet risen. Stimulus has just recently ended. Nothing’s had time to happen, yet.
    “Rule-making comes down to cost-benefit. The government can make mortgages much harder to get for well-qualified deserving homeowners, but the cost is great and this penalizes responsible citizens.”
    How does it penalize them? By making them wait until they can afford the payments over 25-years? I’m not sure how this was “penalizing”, if it failed to be penalizing prior to 2006, when 35-year amortizations were introduced. Could you explain how something that worked so well for so long (25-year ams.) are penalizing?
    “Long-term amortizations have been around for several years in other jurisdictions. If you travel through Europe you’ll find 99 year amortizations, and naturally you’ll find interest-only mortgage”
    The current existence of such mortgages is not an argument as to whether or not they are a good idea. No one will argue that these mortgages are not good for lenders- of course they are, as they ensure the lenders get much larger interest amounts paid to them. Are they good for borrowers, particularly during
    an external economic shock, such as a recession? I would argue not. Again, define how a mortgage in which the payments don’t dent the principal for years are a good idea for buyers, and the market in general.
    Thanks for your responses, by the way. I hold out as much hope as anyone that Canada will make it through this well, but there’s just no historical precedent for what’s happened to the economy and the effects of the amount of government intervention that’s occurred both prior to and immediately after 2008. The test will be the rise in interest rates. A person with a shorter amortization has much greater financial room to maneuver if a low or negative equity situation arises. I’d be pleased to run and post some examples of this, if you like. :)

  19. How is encouraging Canadians to pay down debt more quickly a good thing for the economy as a whole? And since longer amortizations have been around for so little time, how do we know that it actually encourages Canadians to pay down debt more quickly anyway?
    I got my 40 year amortization (on my home) as an insurance policy against job loss, interest rate increases (it’s a variable), or other unforeseen circumstances. Less than 3 years later, I have under 33 years left to pay. Some people on 25 year amortizations, through HELOCs or refinancing still have 25 years to pay even after paying their mortgage for many years
    You may argue that I’m not typical, but that’s not the point Rob made: his point is that it does little good to deny *well qualified borrowers* the option to have longer amortizations.

  20. How is encouraging Canadians to pay down debt more quickly a good thing for the economy as a whole? And since longer amortizations have been around for so little time, how do we know that it actually encourages Canadians to pay down debt more quickly anyway?
    I got my 40 year amortization (on my home) as an insurance policy against job loss, interest rate increases (it’s a variable), or other unforeseen circumstances. Less than 3 years later, I have under 33 years left to pay. Some people on 25 year amortizations, through HELOCs or refinancing still have 25 years to pay even after paying their mortgage for many years
    You may argue that I’m not typical, but that’s not the point Rob made: his point is that it does little good to deny *well qualified borrowers* the option to have longer amortizations. … Now, CMHC might decide to set a higher bar for “well qualified”, but that’s different …

  21. So, no one seems to question the assertion that putting money towards your home is always the best investment. As the father of a young family, I have more savings options than I can maximize (I’m sure Ed Clark has different problems) … Mortgage prepayments, RRSP, TFSA, RESP, … Isn’t some form of diversification advisable here? Surely, giving well qualified borrowers the option to do so is not bad policy for the government?
    Again, the assumption that 35 years amortization = less savings is not universally valid. Just like owning isn’t for everyone, some people may plan to downsize in 25 years; owning their home outright by then may not be the “best” investment strategy for them.

  22. ???
    I think that the one thing we can all agree upon is that putting money towards your home is always the worst investment longterm.
    Owning one’s home is great for emotional piece of mind. But financially, there is ample evidence that it is the lowest performing asset available.

  23. Based on your logic maybe we should cut back amortizations to 15 years? Or maybe the government should pull support for housing altogether and let prices fall 35% like the US?
    Why don’t we be truthful. Drawing the line at 25 years is entirely arbitrary. If you can prove (with facts not emotions) that 35 year amortizations are too risky then fine, outlaw them. If not, then stop trying to legislate responsible Canadian’s lives based on uneducated opinions of how the world should be.

  24. 90% of all people now are taking a 35 Year mortgage, averaging only 7% down here in Alberta, Canada. about 50 people a day are defaulting 90 days or more on their mortgages currently. According to my findings, only 5% of people taking a 35 year mortgage are paying any money above the mininum payment. And in Canda over 40 Billion dollars of debt has been put against already purchased homes in lines of credit.
    The 40 year, then made 35 year (which was originally created by our conservative Government) mortgage has created a housing bubble much like the subprime situation in the states. Prices bubbled. It couldn’t last. WHat is that? Do I hear a POP?

  25. It looks to me like you’re the one who suggests legislating behavior is a good thing. If 35 year, 5% down loans are as risk free as you suggest, surely private insurers would insure them and private banks would finance them. After all they’re twice as profitable as 25 year loans. So why insist that the government provide guarantees if these loans are so prudent?
    If you have a worldview that says that availability of 35 year ams is the way the world “should be” all the power to you. And if you want to be the one co-signing these loans or providing insurance, be my guest. But forcing me and millions if other Canadians to provide that guarantee via the government because you “feel” that 35 year amortizations “should be” available is insulting to Canadians.

  26. It is penalizing people, at least in my opinion, because you are taking away options from them for no good reason.
    As Ed Clark stated, “We don’t have a problem here…”
    Let’s not restrict people’s ability to make choices for themselves on the basis that we need extra layers of protection when we don’t have a problem in the first place.

  27. “Always” the worst investment longterm? That’s pretty strong language.
    You’re sure that home ownership has never been a better investment than say, ABCP or LSIFs?

  28. I am a mortgage broker and have no issue with a 35 year am. Indeed it is better to have a lower amortization because you pay less in interest each payment, but for the most part it is usually just a number to set the payment for a first time home buyer for their first term. I always advise to increase their payments to reduce the amortization. This way can be in essence a 25 year am but if something goes wrong they can decrease it for some cash flow relief if required. When it is time to renew, the client is usually in a better financial position so they can increase there payment for the second term by lowering their amortization. Instead of 30 years left they can decrease to 25 or 20 years. So the first 5 yeat term when amortized over 35 years is simply a way to get people into a home and I don’t know how that can be perceived as bad when compared to renting. The risk is if interest rates start to go up but in all honesty everyone has said they are on the way for the last 3 years but here we are still with the lowest rates in history.

  29. “Or maybe the government should pull support for housing altogether and let prices fall 35% like the US?”
    So in your opinion, government meddling in the housing market is inflating prices by 35%. I can’t think of better reasoning to abolish the CMHC.

  30. Its beautiful to see a gentleman that works for a bank, as a CEO discuss mortgages as if he understands them. He’s a CEO I’m sure he has a massive mortgage amortized at 25 years and can relate – this is why he is saying such things? :) The question is not HOW LONG, but what is my overall goal. Sometimes amortizing over 35 years makes sense, and is cheaper when prepayments are added to the equation. Just because they say 35 years dont take until your 70 to start thinking ” geez….I should take a look at paying this off.”

  31. Reducing the amortization to 25 years will not reduce Canadians debt level or increase its net worth. There is nothing wrong with debt that increases ones net worth. The problem comes when Canadian’s use the value of the house to buy bigger cars &TV’s. Canadian’s need the 35 year amortization to be afford to buy a house (asset). We need to drastically reduce the loan to value for refinancing personnel debt. We also need to reduce TDS back to 40%. And retail stores have to stop handing out credit cards like candy on Halloween.

  32. Jen, I agree with your analysis. Longer ams allow people to use more of their future income now. And since the housing market resembles an auction, the greater availability of money will push prices higher. Money spent on housing isn’t available for other needs, such as saving for a rainy day or retirement. The current dismall savings rate combined with record high house price to income levels support this argument.

  33. “There is nothing wrong with debt that increases ones net worth.”
    Think about this. Do you believe that any loan is guaranteed to increase ones net worth, with no chance of things going wrong?
    If so, why are they lending it to you? Why not just eliminate the middle man, and do it themselves.
    Just because debt has CURRENTLY increased someones net worth, does not mean that net worth will remain.
    I am not saying that all borrowing is wrong, but rather that there is a risk vs reward assessment that many people do not understand. They allow themselves to be sold to as they read their Saturday paper “Home” sections with all the beautiful ads and happy-happy articles.

  34. My wife and I chose to by a house with a basement suite. We purchased with 5% down, chose a 35 year mortgage and locked in on a 5 year fixed @3.89%. Our logic was as follows
    1)We where about to have a baby and buying a house seemed to make more sense than moving into a new rental.
    2)We plan to pay off our student loans during the first 5 years of our mortgage leaving us room for interest rate increases on our mortgage
    3)When my wife goes back to work we can make top up payments to pay down our mortgage faster, put more money into our RRSPs, or buy a rental property.
    Why do bankers keep suggesting that we get rid of financial products that make sense for families whose income will dip for about 5 years around the time they have kids. We have good credit, we are making responsible choices, what more do they need.

  35. AMEN!
    How does anyone think that our current rate of debt is sustainable?
    Why are we so different than the U.S? Is it because our government (CMHC) has backed over $1 trillion dollars in loans, of which a fair percentage have less than 5% down on their home.
    CMHC has been manipulated for political ends. The truth is, not everyone can afford to own a home, and when you try to let everyone do it, you create systemic risks for everyone, and reduce the purchasing power of responsible people.

  36. If the CMHC (read, Canadian taxpayers) are the ones backstopping your “options,” then how is this a penalty. If we were dealing with non-taxpayer $$, then I might agree with you.
    What gives anyone the “right” to taxpayer backed loans?
    Homeowners already receive enough subsidies from the feds, I don’t need to be financing someone’s 100 year amortization.

  37. The only thing more insulting is speaking from authority when you’re misinformed about the topic.
    Millions of the Canadians you reference would be forced to wait several more years to buy a home and pay way higher more interest if it wasn’t for CMHC backing the mortgage-backed securities market. Your line about private insurers is pointless. Private insurers wouldn’t be able to insure even 25 year amortizations without federal support.
    Your narrow view of the world simply does not reflect the majority Gibbles. Canada has deemed it a greater good to support the housing market upon which so many of us and the economy rely. No one is forcing citizens to do this. We as Canadians *want* a strong housing market and ours is the strongest on the globe. If you don’t like Canadian housing policies maybe you’d rather move south of the border where things are just so much “better.”

  38. Read more carefully – I didn’t assert anyone’s right to government backed loans.
    I simply pointed out that it is ridiculous to take away options when there is no indication that there is a problem.
    Last I checked, CMHC was doing very well (i.e. realizing a significant profit).

  39. Growing up the typical plan for most everyone was to go to school, get a job, save some money, get married, buy a house and have a family. I know, a little old fashioned.
    I have always believed that an average, responsible working person should be able to afford a house. Owning a house shouldn’t be a “privelage” as some people here seem to think.
    I can’t imagine anyone wanting to be in a 35 year amortization. If that’s what it takes to get in the market for some people then so be it. If they qualify with their credit and debt servicing I don’t see the problem.

  40. How do you not understand that mortgage default rates aren’t going to rise until housing corrects?
    Of course they’re low, everyone has seen huge appreciation in house value over the last decade. Why would anyone default if they can just sell for a profit? The problem appears when prices turn around, and suddenly people are trapped in their houses with negative equity. Just look at US default rates to see how they can explode from a really low level with no warning.
    You’ll see that in the data, but not until after it is too late. Extended amorts to goose the housing market is a bad idea for obvious reasons. It does not make housing more affordable. In the long run it makes it less affordable.
    As for giving people options, yes that would be fine if everyone was operating on a 40 year plan, but let’s face it, most people aren’t. Same reason people keep paying 18% interest on credit cards, people will take advantage of anything they can as long as they can manage the monthly payments. The real fallout won’t be obvious until that group approaches retirement with no savings aside from their house.

  41. Given the major recession that North America just endured, it would also seem obvious that defaults would be materially greater than 0.46%.
    This is a fundamental misunderstanding of what causes defaults. In a rising real estate market, defaults will be low. If someone cannot afford their mortgage, they can always sell their house and reap the profit (assuming they’ve been there for a couple years).
    It’s not until the market corrects will you see defaults start to rise significantly. When that same group of people can no longer pay their mortgage, and now can also no longer sell their house (as their equity does not cover the selling costs, and they can’t come up with the difference) then you’ll see those default rates come up dramatically.
    So if there is a significant correction in certain markets, it could start the ball rolling. If it stays flat we might be alright.

  42. Based on your logic that we should give everyone all the options and let them decide for themselves, why did we remove 0/40 mortgages? Really we should allow any length mortgage that the banks feel like offering. Why not 100 year mortgages? After all, shouldn’t individuals be allowed to manage their own money?

  43. I think the focus shouldn’t be on amortization rates, but downpayments. I have a 35-year amortization, but we also put down 30 percent on the house and are paying it off at a 20-year rate. I know that we’ve made full use of the amortization when we got married, and again when we have daycare costs…and after that, our equivalent amortization (based on payments) will be roughly 25 years.

  44. As someone also on the cusp of having kids, I know we were ‘directed’ into home-buying by the lack of affordable family-friendly rentals on the market.
    Three- and four-bedroom apartments can be rare, particularly in the City of Toronto, and are often not in transit-friendly locales. Meanwhile, house rentals are pretty expensive too. When we searched for rental houses, we found that many were homes that were flipped, but the owners couldn’t get the price they wanted, or multi-res units where we’d be sharing the yards with upstairs and basement tenants.
    Even paying at a 20-year amortization, home buying (and all its ancillary costs) still made more financial sense than renting a 3-4 bedroom house or apartment, for us, not to mention the ancillary benefits of owning your own home.
    We’d have been happy to rent and wait out the current market, if it didn’t mean monthly rental costs of 2000$ or upward.

  45. A lot of my clients have a 35 year amortization but pay accelerated Bi-weekly payments. The mortgage will be paid off in a lot less then 35 years. For some clients a 35 year amortization is the only way they can afford a house. There only other option is to put money down the drain in rent.For most people there house is the biggest asset they will ever own.

  46. why did we remove 0/40 mortgages? Wouldn’t have anything to do with politics, NAH a Government Minister would never do anything like that.

  47. I think the real concern is the recent first-time buyers, who according to CMHC in 2010 have only 7% equity in their home with the majority taking 35 year amortizations. I believe It is optimistic for these new buyers to say they will pay off their mortgages before 35 years, however, “life” does get in the way: children and daycare, job change/ loss, divorce (roughly ~50% of all couples) and the BIG factor, historic low interest rates which have nowhere to go but up…

  48. @ LS
    “This is a fundamental misunderstanding of what causes defaults. In a rising real estate market, defaults will be low.”
    Exactly! Who needs to default when they can just sell in a rising market?
    Considering that crashing interest rates to the floor was enough to get resale house prices up 19% on a national basis from December 2008 to December 2009 (*during* a recession, I might add), it should be very obvious that the hypothesis that there is “no data we’ve seen to suggest 35-year amortizations create unreasonable default risk” has not begun to be tested.

  49. Hi LS,
    Thanks for the post. Statistically, the number one catalyst for Canadian defaults is not rising rates or falling prices. It is, by far, the level of employment. That’s why analysts were quite surprised that defaults rose only 15 basis points by the end of the recession, while unemployment jumped over 250 basis points.
    Falling home prices do have an effect on arrears but this effect has only proven extraordinary in cases where the price declines were precipitated by economic shocks. Canada has just weathered one of the biggest global shocks in history. They don’t get much bigger.
    In terms of rates, interest rates soared into the 20% range during the extremes of the early 80’s, and home prices dropped. Yet, defaults never exceeded 1.02% [Source: CBA]. (By the way, it’s important to define the word “significant.” A 1% default rate on prime mortgages is extreme by historical Canadian standards but quite manageable on an absolute or international scale. Insurers are well-equipped to handle even catastrophic outliers like 3% defaults [which they routinely stress-test for].)
    Lastly, when projecting arrears it’s important to remember that Canadian qualification criteria are notably stronger than international norms. Moreover, mortgages in Canada are recourse loans. You can’t just hand in your keys like millions of Americans have voluntarily chosen to do (a major reason for US defaults and price declines). Factors like these, and an economy that’s at least flat, suggest that defaults will be controllable well into the future.
    Cheers,
    Rob

  50. Hi Jen, Regarding the price/default relationship, please see my comments below. In a post further down I also addressed the fact that 35-year amortizations have indeed been extensively tested for default risk. Canada is not the only country to offer extended amortizations, so there is plenty of data to model them.

  51. tnt1@shaw.ca
    Your numbers are not consistent with industry data. Please name your sources for these claims:
    > 90% of all people now are taking a 35 Year mortgage
    > averaging only 7% down
    > only 5% of people taking a 35 year mortgage are paying any money above the mininum payment

  52. One more thought…
    Other things held equal, people with 35-year amortizations are roughly 14.5% more likely to default than a 25-year borrower. That number is derived from the additional 35-year default insurance premiums (assuming 5% down).
    Even if you hypothetically triple that number (or triple Canada’s overall 0.42% default rate), only a minuscule fraction of Canadians are put at risk solely by virtual of 35-year amortizations.
    Contrast that with the hundreds of thousands of Canadians that benefit greatly from the increased cash-flow flexibility of a 35-year amortization. There are clearly better battles to fight than for amortization restrictions.
    What’s important when projecting defaults is not the amortization; it’s the overall strength of the applicant. Amortization is substantially less important than repayment history, debt ratios, employment/income, equity, etc.

  53. Hi LS,
    Overall default rates may increase noticeably when prices fall 10-15%+. They often do.
    I think what people are really debating, however, is whether 35-year amortizations (in and of themselves) will cause any alarming increase in these default rates. We’ve never seen any data to suggest they will.
    Do extended amortizations boost home prices? Absolutely. But they also serve many greater benefits which have been explained already in depth.
    Capitalistic democracies aren’t perfect. A minority may feel that giving capable borrowers the freedom to manage their own cash flow has perceived drawbacks (e.g. higher home prices). The great majority, however, seem to strongly believe that any perceived drawbacks are offset by the economic and lifestyle benefits of home ownership. That is why our government has set national housing policy the way it has.
    Cheers,
    Rob

  54. I could care less about the ‘experts’ at the CMHC. All I know is that they have no skin in the game. That’s because they’re using my money — because it’s my money that will have to pay the increased taxes that arise if they flub it.
    One of the commentators asked for data on the risks of long amortization of loans. Uhhh – take a look at Japan!
    The real question is what the free markets would do if there was no CMHC. Would banks take the risk of lending 35 years with 5% down. We know what Ed Clark thinks. Kudos to him for his comments, because the CMHC’s policies means little risk for the banks, as their downside is limited, with the taxpayers insuring them.

  55. Unless you’re aware of some kind of law ensuring tax-exempt status for CMHC employees, they have just as much “skin in the game” as you do… and given what actuarials are paid, likely more.

  56. Robert, you are a gracious host, but I have to respectfully point out that those default rates you quote are based on only four years of experience. What do you think they’d look like if it were 1992 instead of 2010?
    Those four years represented a tremendous boom time for Canadian real estate, with interest rates being pulled lower and lower to historic lows we see today.
    Thirty five year ams have only been available since 2006 and 5 year mortgages can be had for 3.45% today. These are not normal times. These aren’t conditions under which you’d expect a correction to take place, resulting in defaults.
    I’m not suggesting that the government restrict amortization — just the opposite. If people want to amortize their houses for 1000 years, I couldn’t care less.
    But government should not be in the business of insuring these loans or determining the amortizations in my view. The GoC isn’t supposed to be an insurance company: it has to get back to the business of governing.
    As Reality Check points out, I’m probably in the minority in thinking this. I’m OK with that. The majority rules in a democracy, but it isn’t always right.
    “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.” — Upton Sinclair.

  57. Rob,
    Although we may obviously disagree on some issues, I’d like to thank you for the time, effort, and professionalism you put into responding. I get a lot of timely, useful information from your blog, which has helped me very much with a RE purchase in the past.
    Congrats with the great discussion you have going here, and thanks again.

  58. You’re missing the point and you’re being ignorant if you think this is about my tax bill…
    My point is that when you take risk out of the equation – things have a tendency to go overboard. It means the bust will be all the greater when it happens. Oh – but we’re not in a bubble, I forgot.

  59. Lets debunk a few myths here.
    1. We all agree that price deflation/stability is good
    (no one seems to complain when they can buy a brand new PC for 1/2 the price of similarly powerful machine of last year)
    So why would it be a good idea to force the cost
    of the basic nessecity (housing) up through extended
    amortization and mortgages backstopped by the taxpayer?
    I find the whole idea preposterous.
    Ideally one should only be considered for a house loan with at least 50% down payment.
    That would do wonderful things for the house prices and affordability.
    2. How is 60+% of home ownership is good?
    (i.e. providing an option to those that don’t have enough dissipline to save for 25% of DP)
    What is so good about locking large masses of people into the same geographical location
    and preventing migration based on the economic needs? (i.e. prices fall and you are locked in
    for the fear of taking a loss on a sale)
    In northern europe the house ownership is less then 50% (I believe it is less then 40% in Germany)
    and their economy is doing splendid. I guess the extra money people have, can be invested into the
    productive assets – like factories, research, better roads, better transportation, health etc.
    Their house prices did not appreciate more then the inflation would allow.
    3. As someone had already mentioned previously, all the statistics and the risk models are wonderful things
    until there is a “black swan” envent that has not been considered. Based on some studies, the frequency
    of these events has been on increase for the past 30 years.

  60. Longterm housing appreciation above inflation is equal to or less than the maintenance costs of the property. Certainly less than 1% above inflation.
    Money in a bank account isn’t an investment. Its a holding place until you put it into an investment.

  61. CMHC has provided billions of dollars in profit to taxpayers. Without CMHC you would pay more in federal taxes and our economy would be a fraction of its current size. Real estate is no less than 1/5 of our economy. Without government support hundreds of thousands of people would lose their jobs. Plains and simple. That is what you are advocating.
    CMHC is extremely well managed and has never lost money over the long-run. You should be far more concerned with how the government is managing your CPP money.

  62. @Dimitri
    Have you ever stopped to wonder why the government supports the real estate market? Could it have anything to do with Canadians’ preference to own instead of rent? Maybe it has something to do with the 15% unemployment rate we’d have without a healthy real estate market? Or maybe Canadians prefer real estate as an asset class and the government doesn’t want to detroy their retirement nest eggs. I have a feeling the government knows a lot more than you about this topic.

  63. Gibbles: You’re on the wrong forum if you think people here are stupid enough to fall for your analogy of American and Canadian mortgage markets.

  64. If you are going to draw parallels at least do your research first.
    Japan had a bubble yes. They also had 8% GDP growth, a runaway money supply, and highly questionable lending practices.
    I suspect you and Gibbles are the same person based on your uninformed analogies.

  65. @vj
    History shows time and time again that, governments are generally clueless about what is needed or what works in a long run . Most of their politically motivated maneuvers are done to have an imidiate appeal to the great masses and are highly myopic.
    The fact that our economy is so dependent on low skill labor force is a shame.
    The fact that our dear govt. has partaken in the policy that blew sky high down South (100% ownership mandate) is borderline criminal.
    These policies are unsustainable (environmentally, economically or otherwise) yet you claim that this is what Canadians desire, conveniently overlooking the existing alternatives and the fact that the choices had been artificially limited.
    Don’t you think there is something extremely senile in making a consumable (yes house is a consumable) an investment grade asset?
    An average family in Toronto now spends over 53% (I believe after tax) of income on shelter. In Vancouver it is over 70%. (you can find statistics on Google).

  66. Hi Jen,
    I think I’ve addressed most of these points in various posts above, but I’ll clarify a few items here for good measure.
    1) There is ample data to model default risk on 35-year amortizations. As I mentioned, insurers and lender don’t need to use Canadian data.
    2) As noted in other posts, rising interest rates have proven to be far less correlated with default risk than the primary driver: unemployment. Rising rates portend a strengthening economy so many economists expect defaults to actually fall or stay roughly the same when rates rise.
    3) The government deemed 35-year amortization as essential for increased home ownership and economic growth. I understand that a minority such as yourself disagree with the logic but home ownership, low interest rates, and home price appreciation are ideals supported by the vast majority of Canadians.
    4) The point I made about extended amortizations abroad was merely to establish that there is ample data to model default risk on these products.
    Cheers,
    Rob

  67. Hi Gibbles,
    Per my notes elsewhere on this thread, lenders and insurers have an abundance of international data to model default risk. They don’t rely on the short history of long-ams in Canada.
    As for the determining amortizations, that’s the job of almost every finance regulator worldwide. Limits are set for the good of the people. Our country has deemed 35-year amortizations to be appropriate because it’s a low-risk way to foster the ideals Canadians believe in, namely a stable and growing real estate sector.
    Cheers,
    Rob

  68. Personal attacks aren’t necessary, NT.
    Just because we disagree it doesn’t mean either of us is “uninformed”.
    Are these forums open for intelligent debate or intended only to pump the industry?
    If opposing viewpoints are unwelcome, please let me know Rob, and I’ll stop posting.

  69. Forgive me for the assumption that you’re concerned about your tax bill, but your comment was that CMHC was using “[your] money”… and it’s “[your] money that will have to pay the increased taxes that arise if they flub it.”
    If you and others are going to allege massive bias on the part of CMHC, some proof beyond your gut feeling is warranted.

  70. Economic benefits of home ownership? You mean like higher unemployment rate? http://www.slate.com/id/2161834/
    http://www.nmhc.org/Content/ServeFile.cfm?FileID=165
    You describe it as giving capable borrowers the freedom to manage their own cash flow, which is a very rosy way of putting it. In reality we’re guaranteeing the loans of both capable and non-capable borrowers, and removing any and all risk from the banks. I fully support 35 year mortgages. Heck, make it 50 years if you want, but that should be the bank’s responsibility, and they will price the risk in accordingly.
    Giving someone with 5% down (or -2% down, as with some 7% cash back schemes) and a 35 year amortization the same rate and protection as someone with 40% down on a 25 year am is incredibly market distorting.

  71. Is it just me, or have the premiums that ALL borrowers pay up front for these extended ams not been taken into account by any of the naysayers as far as default costs/taxpayer burden are concerned? It’s not like cmhc/gov’t is backstopping these loans out of the goodness of their hearts on the backs of taxpayers here people. Even exceptionally strong borrowers are required to pay the higher premium despite their minimal default risk. Is it not the responsibility of CMHC to ensure that the premiums collected will cover defaults?

  72. Hi Gibbles,
    If I may address your question, counterpoints are essential to bringing key information to the surface. That’s why we truly appreciate all thoughtful points of view, including those in disagreement with the topics at hand.
    All we hope for is that people be civil and try their best to research claims before making them. The last thing we want to do is censor comments, but we have in the past. In cases where another poster labels someone as uninformed, it’s a judgement call. If the accuser backs up his statement with appropriate facts, we have to ask ourselves to what extent they are accurate. Moderation is not always easy unfortunately.
    In any event, we absolutely do value your contributions and thank you for posting!
    Warmest regards,
    Elizabeth, CMT

  73. I’m probably going to get eaten alive by the anti-CMHC crowd, but I had the same question as you a few months ago I and reasoned it as follows:
    – CMHC collects 2.75% of loan value on 5% down (3.15% for 5/35, higher for investment properties in the past, up to 6.5%!) I don’t know what the “average” insurance premium CMHC collects on its entire porfolio of loans is.
    – 0.45% of home borrowers go into default. I also don’t know how much of this 0.45% had insured loans or the distribution amongst the original premiums they would have originally paid to CMHC. In addition, it is my understanding the when a forclosure or POS occurs, CMHC would only pay out the shortfall (i.e. any bank loss up to the insured amount) after the property is sold. Therefore, thanks to robust RE values in the last decade and assuming some mortgage paydown prior to default, I can’t see how CMHC would have to pay that much out at all.
    – to me, the spread between the insurance premiums collected and the default rate is adequate to keep CMHC capitalized provided there is no significant increase in deliquencies. As we’ve learned here and elsewhere, deliquences are tied more to the unemployment than falling RE values like some are predicting.

  74. Also, CMHC has a number of incentive programs which provide cash to borrowers with CMHC insured loans for energy-efficient improvements, low-income or senior housing constructions/renovations, and more. It is my understanding that CMHC “self-funds” these programs as well as paying out profits to the Gov. and keeping some sort of minimum cash reserves (I would assume so, at least).

  75. What is not talked about is the amount of personal debt Canadians have. There is no comparison… savings are negative interest rates are low and the government allows people to pull out RRSPs to buy homes.
    I think many mortgage brokers don’t like the idea.(going from a 35 year to 25 year amortization). This will cut down the number of people to buy over priced real estate they can’t afford. In the end it may be too late to stop the real estate bubble.
    So it could also be good Pr for the bank when things go bad.

  76. My sister-in-law in Spain took out a 70 year mortgage, i.e. her kids finish paying it. With this someone making $1500 a month can actually buy a $400 000 property. This just to give you an idea about how far it can go. The bubble collapsed in Spain and now they are under water. I believe your life expectancy should dictate the maximum amortization.

  77. You technically shoudn’t even have qualified for your mortgage. 40 years justified?
    Are you serious? Be real buddy. You should be living with your parents or learn how to invest into a savings plan. Thanks

  78. Hi Invest your money,
    Naturally, your beliefs and personal situation may be very different from Chris’s. Varied opinions make for a good debate, but we need to be careful about dictating our lifestyle opinions on other sensible people.
    Most Canadians generally believe that responsible citizens shouldn’t be told how to run their lives. As long as a borrower is honest and a minimal default risk, they’ve earned the right to manage their own cash flow using any government-backed mortgage options available.
    Cheers,
    Rob

  79. Hi LS,
    If home ownership causes unemployment in Canada (I’m not saying it does) then that unemployment is regionalized. On a national basis, there’s probably very little correlation to speak of. Moreover, virtually every notable economist will support the vital economic effect of real estate on Canada’s economy.
    It’s also worth noting that supporting the real estate sector benefits renters as well. Someone has to own the homes that people rent. Incentives to buy/develop rental stock serve an important national interest. Well-qualified individuals who purchase rental properties with 35-year amortizations, for example, provide an important economic benefit.
    Regarding the government guaranteeing non-capable borrowers, I’d respectfully but completely disagree with that statement. The statistics simply don’t support it.
    Moreover, lenders cannot freely lend to bad borrowers because there is a cost, both a direct and an opportunity cost, despite those loans being insured. In order for that to be clear, it’s essential to understand the default process and lender costs and revenues on a mortgage. There are articles in our archive on this very topic.
    In sum, we really need to step back and focus on default rates. If evidence appears to suggest they’re unmanageable then perhaps extended amortizations should be curtailed. But the empirical evidence absolutely doesn’t support that. People manage their mortgage finances exceptionally well in this country, be they 25- or 35-year borrowers. Therefore, the greater good of borrower choice must take precedence given that (last time I checked) Canada is still a free-market economy. ;)
    Cheers,
    Rob

  80. As a home owner I’m all for higher home prices. The government should allow 200 year amortizations if it keeps prices high. You wishful thinkers that want prices to fall because you can’t afford a house should rent and shut your yappers. Hahaha……….

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