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Should all Mortgages in Canada be Capped at 25 Year Amortization?

If there was an outcry when the Department of Finance capped amortization lengths on insured mortgages, there may be an all out war if their newest proposed changes are to go through. According to the industry newsletter published by Canadian Mortgage Trends, the Office of the Superintendent of Financial Institutions (OSFI) is considering capping all mortgages in Canada at 25-year amortizations.

Currently, a mortgage can be capped at 30 years if a borrower has a 20 per cent down payment and a strong credit rating. If a borrower doesn’t have the full 20 per cent, they need to also buy mortgage insurance, which is ┬ácostly fee, and their mortgage cannot have an amortization longer than 25 years. This change was made last July, and it’s caused a lot of buyers to hold off on their home purchase in order to avoid paying huge monthly mortgage payments, along with the insurance on that mortgage.

The OSFI told Canadian Mortgage Trends that they’re currently “doing some preliminary consultation with financial institutions,” to speak about the issue; and that it’s “working to determine the desirability of some changes given current conditions in housing markets and recent trends in household indebtedness.”

But it’s not just the banks and financial institutions that the OSFI is consulting with. They want to know what the public thinks, too.

“A decision in that regard would be taken once we hear back from the industry,” the regulator told Canadian Mortgage Trends. “Any proposed changes to our mortgage guideline that may result from this work would be subject to a public consultation process.”

The reason for the move would undoubtedly be due to the alarming rate at which household debt is rising; and the fact that the government is taking different approaches in order to prevent a housing bubble from forming – or bursting.

The question is, would this measure work?

Many buyers have already been kept out of the market because they can’t afford that hefty down payment, in a time when housing prices only continue to rise, and mortgage insurance too. Should the buyers that are still out there be restricted to a 25-year amortization period, even with their full down payment, they might be forced out of the market, too.

The positive that would come out of this move would be that it may force prices to start coming down, and at a quicker pace than what’s been seen in some parts of the country. That could help some of those buyers that have been edged out thus far, and could in turn prevent that bubble that the government is so worried about.

What do you think? Should all mortgages in Canada be limited to 25-year amortizations? Or will this only further hurt an already cooling market?

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