For sale signs in front of homes in Calgary.TODD KOROL/The Globe and Mail
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More than one-third of first-time home buyers say they would take a longer amortization period on their mortgage if they could, according to a Google Consumer Survey that was done for The Globe and Mail.
Long amortizations are controversial. There was a period around 2006 when Canadians were able to obtain 40-year mortgages that were covered by government-backed mortgage insurance. The U.S. subprime crisis scared former Finance Minister Jim Flaherty into changing that, and in a series of steps, he ultimately capped the length of insured mortgages at 25 years, a change that took effect in mid-2012. The longer the amortization, the greater the amount of interest that the consumer is on the hook for. But consumers sometimes prefer lengthier mortgages because their monthly payments are smaller.
Mr. Flaherty's changes only applied to borrowers who have down payments of less than 20 per cent, because those are the borrowers for whom mortgage insurance is mandatory. Banks are still offering 30-year amortizations to borrowers who have a down payment of at least 20 per cent. Canada's banking regulator spent considerable effort last year gathering detailed information from banks as it contemplated barring them from offering 30-year uninsured mortgages. So far it has decided not to act.
Sean Amato-Gauci, senior vice-president of home equity financing at Royal Bank of Canada, the country's largest mortgage lender, says RBC has found that the proportion of consumers with 40-year mortgages who default is greater than the proportion of those with shorter amortizations who default. But he says there's not much difference in the default rates between 25- and 30-year mortgages.
"We look at the individual components of the applicant and the deal, and we structure it in a way that is the best for the consumer and for ourselves," he says. "In some cases you curb amortization, in some cases you actually curb on loan-to-value, but our analysis has shown there's no increased risk between 25 and 30 years. Above 30 years there was. And we still see in our relatively small cohort of clients that were acquired in the era where you had the 35- and 40-year (amortizations) that there's definitely a difference in terms of performance."
The No. 1 reason cited by the first-time buyers who wished they had a longer amortization was to save for retirement, according to the Google survey.
It found that 35.9 per cent of first-time buyers have a 25-year amortization, and that 19.3 per cent have a 30-year amortization. Perhaps not surprisingly, younger respondents tended to have longer amortizations.
The majority of first-time buyers said they would not take a longer amortization because they want to be mortgage-free quickly.