Politically, the federal government has to do something to make home buying more affordable.
The polling firm Abacus Data says millennials will make up the largest group of eligible voters in the election coming this fall, and housing affordability is their top priority. The government is under pressure to respond in a way that helps young people realize their urgent desire to become owners while preventing them from financially maiming themselves and the economy by purchasing homes they can’t properly afford.
The best thing the government could do for housing from a pure policy point of view is to maintain the status quo and see whether the cooling trend in sales continues. But that might not bring relief fast enough for all the people stressing about housing affordability.
The emotional health of this country seems to depend on people, particularly young adults, being able to buy houses. Renting compares well in a financial sense if you invest the savings over not owning, but there is no sign that society is ready to accept it as anything more than a stopgap. Also, renting is stupid expensive in cities such as Toronto and Vancouver.
Here’s how the government should help millennials buy a home: Leave the stress tests for mortgage applicants in place, but increase the maximum amortization period for people with small down payments to 30 years from 25. Finance Minister Bill Morneau is reportedly considering the 30-year option.
This isn’t an ideal approach because it will stimulate the market and probably cause prices to rise. But it will make housing more affordable on the whole and ease the financial pressure on new buyers.
Mortgages with a 30-year amortization are actually available now for buyers who have a down payment of 20 per cent or more and thus don’t need to pay for mortgage default insurance. According to the Office of the Superintendent of Financial Institutions, about 47 per cent of uninsured mortgages had amortizations longer than 25 years in mid-2018.
Thirty-year mortgages were widely available until 2012, when the federal government made them off limits for people putting less than 20 per cent down. A press release issued at the time said this measure would “reduce the total interest payments Canadian families make on their mortgages, helping them build up equity in their homes more quickly and pay off their mortgages sooner.”
It’s true – longer amortization periods are bad personal finance because you pay more mortgage interest. But they also make houses more affordable by reducing the monthly costs of owning a home.
Here’s an example I used in a column last fall about the benefits of 30-year mortgages:
Let’s start with a $500,000 house bought with the combination of $100,000 down and a five-year, fixed-rate mortgage at 3.5 per cent. Total interest paid is $199,123 for 25 years and $244,595 over 30 years – that’s a 22.8-per-cent increase for using a 30-year amortization. The monthly payment is $1,997 for a 25-year amortization and $1,790 for 30 years – a significant saving for cash-hungry families.
The case for the 30-year mortgage amortization is backed by demographics. Canadians are living and working longer – why can’t this be reflected in the payback period for mortgages? Resurrecting the 35- and 40-year mortgages that used to be widely available is pushing it, but 30 years seems right for the times.
Mortgage stress tests require that home buyers are able to afford making their payments if interest rates surge. People who make a living from the sale of homes argue, with some justification, that the stress test requires buyers to weather more of a rate increase than we’re likely to see in today’s slow-growth economy.
The stress test might be overkill as a way of ensuring people can afford higher rates, but in a backhanded way, it’s good for your personal finances. To pass a stress test, you might have to buy a less-expensive home than you planned. Your mortgage payments will be more manageable, as might other ownership costs.
Ideally, the government would act on housing only when the market blows too hot or cold. In the real world, that won’t fly, so bring on the 30-year mortgage.
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