Federal Finance Minister Jim Flaherty’s paternalistic move to eliminate high-ratio 30-year mortgages will only make it harder for younger families in B.C. to make ends meet.
While his focus was on high-ratio mortgages, the changes that are scheduled to come into effect July 9 will eliminate the 30-year mortgage in Canada for conventional mortgages with a down payment of less than 20% and will likely result in that option being removed for mortgages that have down payments of 20% and higher.
While much has been reported about the impact to first-time home buyers, the changes will also be felt by young families hoping to move up in the housing market because they need added bedroom or living space.
Flaherty claims the latest reduction in amortization periods was designed to save “high-risk” home owners by reducing their overall interest payments over the life of their mortgage. But less sweeping changes could have accomplished the job and kept mortgage payments affordable. For high-ratio mortgages, he could have required borrowers to make weekly or bi-weekly payments, which would save them tens of thousands in interest without increasing their overall monthly payment. Flaherty could also have required 30-year mortgage holders to increase monthly payments to reduce the amortization period within a given term. Most financial institutions already provide that option, but some borrowers choose not to take advantage of it because they prefer to have a higher monthly household cash flow. The spring report by the Canadian Association of Accredited Mortgage Professionals found that nearly a quarter of mortgage holders voluntarily increased their mortgage payments in the past year.
Ignoring signs that Canadians are prudent borrowers, Flaherty’s move has cut 11.5% out of a family’s household budget for potential home owners who have a 5% down payment and for those looking for a few hundred additional square feet of living space, according to an analysis by Helmut Pastrick, Central 1 Credit Union’s chief economist. The changes will also hurt renters, who will face an even tighter rental market as potential first-time buyers delay their purchases even more for a bigger down payment or a 10% increase in their wages. Pastrick said this could result in 10% fewer first-time home sales over the next few years. •
