 |
| John O'Fee |
** writers note to me,
which I am passing on to you ... given that I teach real estate transactions
in Thompson Rivers University (TRU) law school, I feel qualified to comment
When the sub-prime mortgage crisis hit the United States in 2008 it triggered a global recession. By almost all accounts, Canada emerged from this crisis remarkably unscathed. The reason for this is that Canada has stricter rules to qualify for mortgages and stricter rules about paying them off.
You might think this would result in lower rates of home ownership in Canada when compared to countries with laxer rules like the United States. In fact, home ownership rates are nearly identical despite the fact that Americans can generally deduct the cost of mortgage interest from their income in the United States.
Mortgage terminology can be confusing but a couple of simple concepts should be understood. Every mortgage has an interest rate, a term (how long until the mortgage has to be renewed) and an amortization period (how long it will take to pay the mortgage off at the current payment rate). It’s only natural to presume that extending the amortization period will reduce the payment amount. After all, if you take longer to pay something off, your payment should go down.
However, the effects are not as dramatic as you might infer.
When the sub-prime mortgage crisis hit the United States in 2008 it triggered a global recession. By almost all accounts, Canada emerged from this crisis remarkably unscathed. The reason for this is that Canada has stricter rules to qualify for mortgages and stricter rules about paying them off.
You might think this would result in lower rates of home ownership in Canada when compared to countries with laxer rules like the United States. In fact, home ownership rates are nearly identical despite the fact that Americans can generally deduct the cost of mortgage interest from their income in the United States.
Mortgage terminology can be confusing but a couple of simple concepts should be understood. Every mortgage has an interest rate, a term (how long until the mortgage has to be renewed) and an amortization period (how long it will take to pay the mortgage off at the current payment rate). It’s only natural to presume that extending the amortization period will reduce the payment amount. After all, if you take longer to pay something off, your payment should go down.
However, the effects are not as dramatic as you might infer.
Let’s
take a 30-year old couple starting with a $550,000 home in Kamloops. We’ll set them up with a $500,000 mortgage based
on a 25 year amortization period. Their
payment would be $2630 per month and they could be debt free by 55.
If we increase the amortization period to Andrew Scheer’s proposed 30 years (a 20% increase in time) would that cut the payment by 20%? No. This couple’s payment would only reduce to $2378 just over a 10% drop. Instead of paying $789,000 over the course of a 25-year mortgage, the couple with Scheer’s proposed 30-year mortgage would pay about $856,000 and not be out of debt until they turned 60.
All of this presumes that interest rates remain stable and don’t rise dramatically.
What if instead this mortgage was based on a 15-year amortization period?
The payment would jump to $3690 but the total of all payments would be $664,200. A couple able to sacrifice and pay down their mortgage faster would be debt free in their mid 40’s and end up paying over $120,000 less for their home.
Shouldn’t we be encouraging more of that?
The late Conservative finance minister Jim Flaherty deserves some credit for recognizing that extending amortization periods and qualifying more people for mortgages would not contribute to a stable growing economy. Putting people into long term mortgage commitments at the fringes of affordability is generally regarded as a recipe for disaster.
It might make for a good talking point, but once you dig into the numbers it is poor fiscal policy.
ABOUT JOHN O’FEE:
Kamloops native John O’Fee graduated from UBC receiving degrees in Commerce and Law and established a law practice in Kamloops focussing on real estate development, corporate transactions, wills and estates.
John also served three terms as a Kamloops school trustee and 11 years on Kamloops city council before leaving private legal practice in 2011 to become CEO of the Tk’emlúps te Secwepemc (Kamloops Indian Band).
John is a past chair of the Interior Health Authority. He has been recognized as a distinguished Alumnus of TRU, selected for a BC Community Achievement Award, designated as Queen’s Counsel, and received the Dean’s Award for Excellence in Teaching.
(see my commentary: "It was tough;however, it was a personal choice so that buying a first home could happen –and the government wasn’t there acting as big brother to say NO"
If we increase the amortization period to Andrew Scheer’s proposed 30 years (a 20% increase in time) would that cut the payment by 20%? No. This couple’s payment would only reduce to $2378 just over a 10% drop. Instead of paying $789,000 over the course of a 25-year mortgage, the couple with Scheer’s proposed 30-year mortgage would pay about $856,000 and not be out of debt until they turned 60.
All of this presumes that interest rates remain stable and don’t rise dramatically.
What if instead this mortgage was based on a 15-year amortization period?
The payment would jump to $3690 but the total of all payments would be $664,200. A couple able to sacrifice and pay down their mortgage faster would be debt free in their mid 40’s and end up paying over $120,000 less for their home.
Shouldn’t we be encouraging more of that?
The late Conservative finance minister Jim Flaherty deserves some credit for recognizing that extending amortization periods and qualifying more people for mortgages would not contribute to a stable growing economy. Putting people into long term mortgage commitments at the fringes of affordability is generally regarded as a recipe for disaster.
It might make for a good talking point, but once you dig into the numbers it is poor fiscal policy.
ABOUT JOHN O’FEE:
Kamloops native John O’Fee graduated from UBC receiving degrees in Commerce and Law and established a law practice in Kamloops focussing on real estate development, corporate transactions, wills and estates.
John also served three terms as a Kamloops school trustee and 11 years on Kamloops city council before leaving private legal practice in 2011 to become CEO of the Tk’emlúps te Secwepemc (Kamloops Indian Band).
John is a past chair of the Interior Health Authority. He has been recognized as a distinguished Alumnus of TRU, selected for a BC Community Achievement Award, designated as Queen’s Counsel, and received the Dean’s Award for Excellence in Teaching.
Comments
Post a Comment