Jim Flaherty is defending his decision to interfere in the mortgage market on the basis that he is preventing Canadians from borrowing more than they can afford. This is nonsense. After tightening mortgage rules 4 times in the past 4 years and enhancing the powers of the Office of the Superintendent of Financial Institutions (OSFI) to oversee prudent lending practices, we now have extremely conservative lending practices. Anybody that still qualifies for a mortgage deserves to own their own home.
Even if mortgage rates skyrocket in the next few years, there is no risk to homeowners if they choose a 5 year fixed rate mortgage or even better a 10 year fixed rate mortgage. Yes, job loss, divorce or a severe illness are all risks to paying your mortgage, but that family has to live somewhere. Defaulting on your rent will give you the same consequences as defaulting on your mortgage, eviction. Only in the case of a mortgage, lenders and mortgage insurers have work-out solutions available to eliminate monthly payments for short periods of time.
Let’s look at an example of a first time home buyer purchasing a $400,000 home with the minimum 5% downpayment. At today’s best 5 year fixed mortgage rate of 2.89% and the maximum amortization period of 25 years they will pay down their mortgage aggressively. By the time they reach their 5 year renewal they will have paid their mortgage down to $333,027. That’s a net worth gain of over $66,000 just by paying their regular monthly payments of $1,825, about the same they would’ve had to pay in rent.
That $66,000 will actually be significantly more once you take price appreciation into account. According to a recent article in the Globe and Mail titled “Gloom Surrounding House Prices Spreads” housing prices will not appreciate by much in the years ahead. Quoting both Bank of Nova Scotia’s economist and a report from TD Bank it’s suggested that we can only expect a gloomy 2% appreciation per year. Well at 2%, our $400,000 home will appreciate to $441,632. This rate of appreciation is significantly below rates we’ve seen over the past 20 years but is enough to create over a $108,000 in equity for our first time buyers.
Our first time buyer is well ahead of where they would have been had they been renting for the past 5 years – REGARDLESS of mortgage rate changes. If they don’t like the new mortgage rates they could always sell their home and resume renting, but this too is nonsensical. Mortgage rates move in step with inflation. If the rates have increased significantly then you can bet your bottom dollar that rental rates have too, and so in turn have income levels.
The bottom line is that, it’s prudent to adjust lending standards to meet economic conditions, but it’s absolutely unacceptable to price fix mortgage rates through collusion or government intervention. Mr. Flaherty needs to respect his boundaries.