Reports out of Ottawa could spell big changes for mortgage borrowers concerning amortization rates, according to The Globe and Mail.
Apparently The Office of the Superintendent of Financial Institutions Canada (OSFI) is weighing the pros and cons of uninsured mortgages of more than 25 years. Brock Kruger, OSFI spokesman, has attributed this attention to the high levels of debt carried by many Canadian households, among other matters.
"We are working to determine the desirability of some changes given current conditions in housing markets and recent trends in household indebtedness," Kruger told The Globe and Mail.
Considering the fact that Finance Minister Jim Flaherty tightened mortgage rules four times in as many years, the most recent being in July 2012, it's not far-fetched to think this attention from OSFI could result in further restrictions on home loans.
According to Canadian Mortgage Trends, OSFI is considering limiting the amortization rate on conventional mortgages, those with 20 percent or more equity, to 25 years. These mortgages can currently have amortization rates as high as 35 years.
"A decision in that regard would be taken once we hear back from the industry," Canadian Mortgage Trends quoted an OSFI spokesman as saying. "Any proposed changes to our mortgage guideline that may result from this work would be subject to a public consultation process."
While this behind-the-scenes analysis is all well and good, the real question is a simple one: How will this affect homebuyers?
The ins and outs of amortization
In order to answer that, the first step is fully understanding what amortization is and how it relates to mortgage borrowers.
Amortization is the process of paying off debt at regular intervals over a specific period of time. For homebuyers, an amortization rate is the number of years a person has to pay off their mortgage. Choosing the length of amortization is a big decision for homebuyers, as the rate will affect how much interest is paid over the lifetime of a home loan.
While 25 years is the standard amortization rate, it is possible to choose both shorter and longer periods. Shorter amortization rates will save borrowers money over the long term. The less time a borrower has to pay back a home loan, the less time there is for interest to build up. This can be especially beneficial if a homeowner has a loan with a high mortgage rate. Also, since the principal balance of the loan is being paid back at a faster rate, borrowers with shorter amortizations build up equity in their properties faster.
Meanwhile, a longer amortization rate means lower monthly payments. For borrowers looking to save money in the short term, this can be a big help. However, while monthly expenses may be less, borrowers should keep in mind that shorter amortization means more money paid in interest over the long run.
An easy way for potential homebuyers to see how their amortization rate will affect their repayment plan is to use an online mortgage calculator. By plugging in the mortgage amount, interest rate and length of amortization into a mortgage calculator, borrowers can get a detailed breakdown of what their home loan will look like.
While it's clear that shorter amortization rates can have financial benefits for borrowers, the question is why the Canadian government is interested in making things more difficult for homebuyers with low ratio mortgages. In order to have an amortization rate of longer than 25 years, borrowers typically have to have a down payment of at least 20 percent, meaning they're not relying on government-insured home loans. It also means that unlike many borrowers, they have the savings necessary to purchase a property in earnest.
So the question remains: Why worry about Canadian borrowers who seemingly have their finances figured out and are opting for reduced monthly payments? They're far from the biggest threat to the housing market, as those who've dealt with the consequences of mortgage tightening can attest to.