Most Banks Move To 30-year Conventional Amortizations

35-year-amortizationsBMO, Scotiabank and TD have all confirmed that, effective March 18, they will restrict both high- and low-ratio mortgages to 30-year maximum amortizations (even though the government’s new rules only require that high-ratio amortizations be limited to 30 years).

CIBC and ING Direct haven’t issued a verdict yet.

As for RBC, it too says, “We have not made a final decision on whether we will offer 35-year amortizations on conventional mortgages.” 

Unofficial sources within RBC have told us they think it may allow 35-year amortizations on conventional mortgages, but that’s unconfirmed. If RBC did, it wouldn’t surprise us. It already has the most liberal qualification rate of the Big 6 on conventional mortgages.

A BMO spokesperson told us, “We support the decision (to lower amortizations) in an effort to reduce consumer debt.” Most other banks are toeing the same line.

When the government last cut high-ratio amortizations from 40 to 35 years in October 2008, banks applied the lower limit to conventional amortizations then as well. So, their conservativeness this time is no surprise.

Very few prime lenders kept 40-year amortizations after October 2008. Merix Financial was one of them. Fortunately, Merix says it will also keep 40-year conventional amortizations after the March 18 changes. That’s fantastic news for responsible consumers who want more payment flexibility. It’s also nice to see a lender that has total confidence in its underwriting.

Once official word is disseminated from CIBC, ING and RBC, we’ll post it here.

Rob McLister, CMT

  1. If you’re are considering the purchase (or sale) of a home it is more important than ever to consult with a professional at the earliest stages of the process. WIth new rules in place and banks making significant changes to their policies, a mortgage broker can help walk you through the process, considering ALL of your options. Even if you’re negotiating a purchase or sale without the assistance of a real estate agent, you can STILL seek the advice of a professional mortgage planner who can answer your important questions.

  2. “Fortunately, Merix says it will also keep 40-year conventional amortizations after the March 18 changes. That’s fantastic news for responsible consumers who want more payment flexibility.”
    Hahahahaha! “Responsible consumers” who take a 40-year mortgage – good one!

  3. Frank,
    Glad we could bring a smile to your face. Picture someone who is highly qualified with 20%+ equity, minimal debt and infinitesimal default potential. Suppose they want to minimize their payments so they can funnel cash flow to a better purpose. Forty-year amortizations are tools which allow that. We don’t judge the reasoning of those people and I would submit, neither should anyone else.

  4. Not to mention the people who have volatile income from year-to-year, who would like the flexibility to raise and lower mortgage payments meaningfully according to cash flow.

  5. Yes, a 40-year amortization does ALLOW for the situation you described, but I’d be interested to see how many people actually use it for that purpose, and not for the purpose of purchasing a house that would otherwise be way out of their price range.
    Look at what happened in the U.S. with sub-prime mortgages. With temporarily low mortgage payments, theoretically people COULD have invested their extra income or used it to pay down their mortgages faster. But we all know what happened instead.
    Just because 40-year amortizations COULD be used responsibly doesn’t mean they WILL. Why not 50-year amortizations? Why not 100? Because in the wrong hands, they lead to a mess for everyone. Not to mention artificially inflated house prices.

  6. Frank,
    It can be a responsible way to handle your cash flow. Why not take a 40 year amortization to keep your payments low and take advantage of the 20% prepayment privilege to bring your amortization down?
    I would rather not be locked into a higher payment in the event of a small financial crisis. I am however responsible enough to make the prepayments.
    The 40 year amortization is a good thing if used responsibly.

  7. I’m a responsible consumer who didn’t want to default on my mortgage. 3 years ago, I took out a 40 year mortgage, even though I had plenty of equity and could have easily afforded a 25 year amortization (or even less, with strain) to hedge against the possibility of job loss (my company was owned by a private equity firm, and so for sale) and interest rate hikes (I chose a variable rate mortgage).
    3 years later, I have fewer than 33 years left in my 40 year schedule. I have no consumer debt.
    How you structure your debt is important in building wealth. As Rob points out, there are many reasons to choose a 40 year amortization other than living in the biggest, most expensive house possible.

  8. To Frank:
    How is a 40 year amortization any worse than the interest only HELOCs sold by banks with infinite amortizations?

  9. This new move is not the way to solve any potential problems we may or may not have in the Canadian housing market. Where the gov’t really needs to crack down is on the amount of credit consumers are extended! Home ownership in most cases would be quite affordable if there wasen’t thousands of dollars in Credit Card debt along with personal LOC’s that are easily accessible! Crack down on credit card companies, and in my opinion we would (moving forward) fix alot of our issues.

  10. and if you call in the next 5 minutes, you will get a second juicer, absolutely free. Just pay additional shipping and handling! LAME SELF PROMOTION.

  11. Those who do take a 40 year am on a conventional mortgage are generally in a better position financially, but want the option of a lower mortgage payment to use those funds towards investments or their family needs. Having 100% Financing with 40 year am’s is where clients got into trouble.

  12. If just one of the major banks decides to continue offering 35 year conventional mortgages, then it is almost certain that the other FI’s will reverse course almost immediately.
    All the evolving and changing rules, sure makes mortgage products ever more confusing for the average consumer.

  13. I too have a 40 year amortization and have managed to take 16 years off the life of it with pre-payment options in 2.5 years.
    There are many benefits to 40 year amortizations that are outside of the “just want to buy more” Brokers that only see it as a way of qualifying larger debt for their clients are not doing any favors and when push comes to shove those clients will be blaming their broker, likely not a good referral source anymore. Exit strategy has to be as important as the entrance strategy and when applied correctly it is a fantastic tool for wealth building, cash flow or consumer debt payoff….which can then be used for pre-payment options.

  14. I heard today that CIBC are having a conference call on Friday where afterwards they should be in a position to provide us with more details on their inclusion or elimination of 35yr amort on conventional deals.

  15. I don’t mean to sound rude but nothing displays ignorance more than comparing American sub-prime to Canadian prime.
    Most Canadians are prudent with their finances. Think about what you’re saying and give people some credit.
    I’ll turn your last paragraph around on you.
    Just because cars COULD travel 200 km/h doesn’t mean drivers WILL. But why not install speed limiters so people can’t drive over 100 km/h? Because in the wrong hands, cars can kill a lot of people.
    You may love big brother meddling in your business but you’d be in the minority. Politicians have gone overboard with legislating responsibility and it’s infringing upon peoples’ right to live their lives.

  16. If most of the people taking 40 year mortgages were financially responsible and low risk, then all the banks would still be offering those kinds of mortgages. The fact that they aren’t shows that the risk is higher, and higher than they are willing to take.
    If the risk was minimal the banks would be all over it.

  17. So the big banks have determined that these long amortizations are too risky.
    So much for the popular theory on this board that long amorts are not higher risk, and they’re just used by highly responsible borrowers to get payment flexibility. That sounded illogical from the start, and now the big guys agree.
    The experts at risk management have made the determination that without a government backstop, those mortgage products are too risky for their liking. If they weren’t, the big banks would be all over it.
    Actions speak louder than words…

  18. I am not sure where you got that it was popular theory on this board that longer amorts are not higher risk? Of course they are. CMHC charges extended amortization surcharges (30yr=.20%,35yr=.40%)
    Certain banks may decide not to offer 35 yr amorts simply because they want to standardize the funding packaging of their mortgage portfolio.

  19. LS
    Don’t come on here trying to distort what people are saying. No one is claiming long term amortizations are used solely by responsible people.
    Also, you are grossly confusing cause and effect. The banks didn’t eliminate 35 year amortizations because they were “too risky.” I defy anyone to post industry statistics showing 35-year amortizations are unreasonably “risky.” If they were that risky do you think the insurance surcharge on 35 year ams would be only 20 basis points???
    The banks’ reason is not risk. They stated they are moving to 30 year ams to help people “save interest costs and pay down their mortgage faster.” That is a direct quote from BMO. By the way, isn’t it ironic to hear that coming from a bank? Pass the shovel.
    Don’t kid yourself. There was no shortage of politics and smoke and mirrors behind this. The banks wanted 30 year amortizations for one reason, to steal market share from brokers and smaller lenders.
    It doesn’t matter what the maximum amortization is, you will always have people over-borrowing. You will never ever prevent people from pushing their limits. The banks know this and if you don’t, study consumer psychology and come back when you do.

  20. I think that most people here are involved in real estate and I for one am not. These 40 year mortgages are what I beleive for people who own one or two or even more revenue properties and they are in the final step of bidding themselves up to a point they all buy hoping someone stupider than them, will pay more than they did. We are in for higher rates within the next 40 years (when and how high are of no concern to me)and prices will fall accordingly.

  21. Good for you. But does your experience reflect that of all 40 am buyers? Just like gambling, there are winners and losers. The winners brag, the losers lick their wounds in silence, so anecdotes like yours are not representative due to self selection bias.

  22. Why does it have to reflect the experience of “all” 40 am buyers in order to be a legitimate option?
    The federal government doesn’t have the responsibility to make sure each and every individual is managing their credit according to a subjective set of criteria. What it does have to do is make sure risks to the overall system are well managed.
    Reasonable people can disagree as to whether the government is properly managing risk, but people not making full (or even partial) use of prepayment options doesn’t mean longer ams are pure evil.
    And I don’t want to imply that people not making use of prepayment options on longer ams are irresponsible. The vast majority of people understand the relationship between amortization length and interest costs. As long as you go in with your eyes open, that choice should be yours.
    Al R

  23. Just trying to figure out the math, but Home Equity Lines are interest only, seems to me that makes the amortization longer than 35 years and they are not changing those. Oh now I see why, the rate is Prime plus 1%, not Prime less .75%, so the banks make alot more profit. This crazy new math gets me confused all the time.

  24. “Most Canadians are prudent with their finances. Think about what you’re saying and give people some credit.”
    Riggggghhhhttt. I guess that’s why we keep setting new records for household debt-to-income ratios in this country. And before you tell me that household assets are rising in value even faster than household debt, please tell me what will happen if we have another stock market downturn, or a U.S. style housing downturn. Assets will decline, debt will stay the same. No wait, let me guess, it’s different up here because Canadian banks are more prudent with their lending policies, therefore housing prices can’t come down ever.
    Also, would be interested to hear how you know that most Canadians are prudent with their finances. That’s a pretty bold statement to make about a country whose average house price-to-income ratio is currently around 5.5 (historical average is around 3.5).

    …..been in this business more then 20 years…

  26. I was only referring to Conventional mortgages offering 40 year amortizations. That is where the low risk comes into play. An A lender offering a 40 year am for LTV’s 80% and below is very careful of the risk they’re taking on. Not everything the banks do is always correct…
    If we did everything the “Banks” did the broker industry wouldn’t be flourishing the way it is.

  27. We took out a 40yr mortgage to allow for payment flexibility three years ago. It’s been great – we could afford ~20 yrs, but this allowed us to either make additional payments or use the cash for other things, plus guarded against job loss (and allowed me to go back to school for one of those years). The thing is that interest rates have been so low (1.5 – 3.5% for us) that I don’t see any real down side to doing it this way.

  28. One of the goals of CMHC was to increase the ability of people to afford houses. When amortizations were raised, the BOC Governor criticized the policy move saying that increased amortizations would artificially inflate prices and ultimately reduce affordability. Now a few years later prices have skyrocketed and the government has realized its mistake. The policy wasn’t having the intended consequence so it was reversed.
    People can say that the banks are following suit for noble reasons like controlling out of control credit, but I don’t buy it. To me, the only explanation that makes sense is that the added interest of 35+ year amortizations doesn’t compensate for the added risk. If it did, one back would make the smart financial move and corner the market on a profitable product for a short time before others followed suit.
    Personally, I’m happy with this decision as 1) I see an increase in affordability for the average consumer and 2) the government (i.e, the taxpayers) will remove some higher risk items from the federal balance sheet.

  29. What a joke of a response. “They want to standardize the funding packaging”… what a crock. If the Banks felt it was not too risky and they would continue to make profit then they would offer it.
    I agree that not all 40 or 35 year amortizations are used for bad reasons but if the Banks won’t do it without government insurance then how can you deny they see it as too risky? The banks will do WHATEVER makes them money. The last financial crisis is proof.

  30. Debt to income is irrelevant for mortgage purposes. When underwriting a mortgage the main things that matter are payments-to-income and the client’s willingness and ability to KEEP making those payments.

  31. wjk
    How are you any less biased??
    People like you come on here yacking about how long amortizations are so risky but you bring no evidence to the table and you overlook contradictory information (like the fact that banks are still selling interest-only HELOCs!!).
    What a joke.

  32. Mabus,
    News flash…..
    Banks are still selling interest-only HELOCs with one million year amortizations.
    Various lenders will still offer 35 and 40 year amortizations.
    So much for your theory.

  33. Hi Chris,
    I don’t understand your connection. The government announced that they will stop backing HELOCs. Because the interest gained compensates for the risk of default, this product will continue to be offered by the Banks. I think your example is consistent with my theory – not a way to refute it.
    Since the HELOC doesn’t help reach CMHC’s goal to allow more people to afford houses, there is no reason for CMHC to provide backing. Seems like a solid policy change to me.
    I’m probably missing something from your argument though.

  34. Denis,
    I’m not sure that your logic holds water.
    Is there any relationship between the payments on the debt, and the amount of the debt?
    If yes, then how can you say that the debt to income ratio is irrelevant.
    Similarly, is there any relationship between a clients amount of payment, and their willingness to continue to make that payment? And further, in the context of a house significantly lower than the mortgage (a la the US and elsewhere)?

  35. Banks do care about people’s debt problems but only when they can manipulate the situation to their advantage. If they are truly interested in helping to curb the personal debt epidemic that’s taking place, the banks would put limitations on the consumption instruments that consumers use to get themselves deeper into debt: personal LOCs and credit cards. And yet, the regulation of these instruments remains unchecked by the government even though they pose serious risk to the banks if the economy takes a dive.
    People shouldn’t kid themselves if they think that HELOCs and high ratio mortgages are the primary culprit. They’re not. It’s the very low interest rates that have been around for the past 3 years and the unsecured debt that people are saddled with. While it’s certainly true that some homeowners have over-extended themselves with their mortgage and HELOC balances, if you ask most consumers today what their most pressing debts are, they will tell you personal LOCs, credit cards, and personal loans. I reckon very few consumers will tell you they can’t afford their mortgage. But many will tell you they just lost track of their spending when banks keep throwing credit at them. Want to go on a trip? Why save up? If you’ve shown you can repay your debts on time, just take $5,000 out of your LOC at prime + 4%. Very convenient indeed until rates start to creep up.
    The banks take a pragmatic approach to protect their interests. They lobby their conservative friends in Ottawa hard by calling on additional restrictions on mortgages, which are low interest instruments that, when used effectively and with proper guidance, can pay off high interest debt (consolidate) and actually create wealth. All of this in an effort to stir attention away from the root cause of the problem. I believe Rob already touched on that point. Personal LOCs and credit cards create no wealth and most people who have access to these facilities use them as an instrument of consumption.

  36. I disagree about the risk posed to the taxpayer. You should also note that most mortgages in this country are standard and not high ratio. Most mortgages are amortized over 25 years or less and 30 and 35-year amortizations aren’t the majority. So the theory that these extended amortizations pose a high risk to taxpayers is nonsense. They do carry some risk, hence the risk premium charged by CMHC. But with default rates at 1% or lower, it’s been a very lucrative business for the insurers. In terms of affordability to the consumer, the payment reduction between 35 and 30-year amortization based on a 300,000 mortgage at today’s rate translates to about $100 a month. Hardly a significant improvement even rates end up increasing a bit.

  37. I believe in theory of ” Save and Spend”. So giving longer amortisation as an incentive for client willing to put more then 20% downpayment is good idea.because once you form RIGHT HABIT you can bank on it later.I am Concern about those making 5% downpayment or playing on real estate market buying more rental property with less downpayment as i pose them a big risk, As because life is imperfect with situation like job loss , untimely death, marital separation etc etc.
    Also doing this would help curb artificial demand of real estate and make life easier for every one.

  38. My point is, lenders are still doing 35 and 40 year amortizations and interest-only HELOCs (which are revolving debt and much riskier than 35 year conventional amortizations).
    This shows that “the added risk” as you put it, is not why banks are withdrawing 35 year amortizations on conventional mortgages.

  39. if you would have started with a 30 yr amortization or 25 for that matter (like you said), you would have a 18 yr amortization now…. thank god you took that 40!

  40. ARE you people insane? or is it me? Every person on here keeps yapping about 40 yr ams and “the bank considers it as low risk”.
    OK guys…so if policy allowed 60 year ams…now I’m assuming these people would be low risk also? Come on
    , get real.

  41. It’s you.
    Amortization by itself is not a predictor of default risk. Otherwise you’d see mass arrears on HELOCS which often have no amortization and are interest only.

  42. “you would have a 18 yr amortization now….”
    Everyone likes to save money but sometimes reducing risk or investing the payment savings in something else is more important. Not everyone is best served by paying off their mortgage as fast as possible.

  43. I assume from your short sightedness and lack of informativeness in your diatribe…probably due to your age appear-ant…100 year amortizations more than helped enable and run the economy throughout Canada when you were still a twinkle in your Daddy’s eye…and your grandparents owned their home eventually because of it…just a tidbit for you!

  44. “You should also note that most mortgages in this country are standard and not high ratio.”
    This is true at the moment, but changing. CMHC reported that of all those who bought a home in 2009, about half had a loan-to-value of greater than 80%.

  45. LS you are completely confusing cause and effect. Banks have chosen to no longer sell 40 year amortizations because it is good optics for them to appear responsible. Menawhile, they sell interest-only LOCs with million-year amortizations ALL DAY LONG.
    40 year ams pose very little additional default risk. The same people will STILL max out their TDS, with or without 35-40 year amortizations. These changes do NOTHING to reduce default risk or keep people from over-spending on housing.
    All it does is screw the truly responsible people who are better off with a longer amortization.

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