Paul’s buying a $1.3 million house in a sexy hood within 905 (not the one that blew up this week, amid hand-written notes of despair). “It’s actually a good deal,” he says bravely, thinking the property’s appreciated considerably since he did the deal a few months ago.
Well, he went to one of the big banks for a mortgage (the green one). The eight hundred grand he arranged came at a good rate – 2.4% – plus [email protected] threw in another $300,000. “Just for things you might need, or whatever.” That piece of the loan isn’t amortized, and can be taken with interest-only payments, also secured by the house. In other words, it’s a borrowing of 85% of the full value of the property, but still not considered a high-ratio loan. So no CMHC insurance.
That’s not all.
“She also offered me an amortization on the $800,000 portion of 30 or 35 years,” Paul reports. Going long would drop the monthly from more than $3,500 to less than three grand. “It was tempting.” But, of course, there’s a cost to lower payments. With a standard 25-am he’d owe $675,700 at the end of the term, and with a thirty-year am, $703,000 would remain – even after making $187,000 in payments.
Now, you may have thought Ottawa banned long-amortization mortgages. Once pegged at 40 years, they were chopped back to 25 by the same Harper government that goofed by extending them in the first place. But that was just for “high-ratio” mortgages – those where the purchaser has less than 20% to put down.
The Harperites, as you recall, also banned CMHC from insuring seven-figure houses which means Paul has to come up with at least a fifth of the purchase price. No problem there, because he’s selling elsewhere and moving up. But in this case the bank is offering him an 85% financing without requiring a CMHC insurance premium and also extending the forbidden fruit of a l-o-n-g amortization. The effect is twofold: monthly payments are less, so on his income he qualifies to borrow more.
There ya go. More evidence wealthy people get a better deal than poor ones. Just like investors paying half the tax on their financial asset income as workies do on their paycheques. But that’s not the point of this post, rather to confirm that real estate is also eating the rich.
Two years ago a minority of uninsured loans (on million+ properties or deals where buyers had more than 20% to put down) had amortizations of more than 25 years. Last year that climbed to 58%, and it’s currently estimated to be 63%. That means almost two-thirds of borrowers – mostly of expensive properties – are opting for loans giving them the lowest monthly payment, even when it means they slow debt repayment.
The Bank of Canada worries about this. It should. When ‘rich’ people buying ‘carriage trade’ homes struggle with their monthlies, it’s just more proof we’re all getting over-extended. In its latest Financial System Review, the bank said: “To help lower the large mortgage payments typical of higher loan-to-income ratios, an increasing proportion of uninsured mortgages have been amortized over more than 25 years. The resulting slower repayment of debt leads to a higher aggregate level of household indebtedness.”
And there’s more. As pointed out here a few times lately, more and more high-end homebuyers (properties over a million) are slipping into the Holy-Crap category (a technical term) of indebtedness. A majority in the GTA owe 450% or more of disposable income, and in YVR it’s four in ten. So, it’s not just the young and feckless who are borrowing beyond their means. The old and fecked are catching up fast.
So let’s put this in context. Five-year, fixed-rate mortgages have descended into bottom-feeding territory. Who ever thought 2.11% would be offered by mortgage brokers? After all, inflation is running perilously close to that, meaning this is akin to free money. At these levels, borrowers can trash home loans at a rate unknown a decade or even five years ago – if they keep amortization periods at 25 years or less. Instead, we’re seeing the opposite, as yesterday’s graph showed. The aggregate of debt is rising wildly, even as borrowing costs decline. So, imagine what happens when rates eventually turn.
Bigger loans and longer ams, meaning lower qualifying incomes, plus add-on lines of credit and higher debt ratios are the dirty secrets of the house-wealthy. When the tide goes out, the naked will be known.