Four of every 10 first-time home buyers who arrange financing with mortgage broker Mike Loleski are putting down as little as possible and taking the maximum time to pay what they owe.
That's life in the housing market of early 2010. Houses cost a mint and many people can't afford them unless they're allowed to put just 5 per cent down and stretch payments over 35 years.
At Mr. Loleski's company, Homefund Corp. in Toronto, nearly 42 per cent of first-time buyers have a down payment of 5 to 7 per cent. Another 12 per cent put just 10 per cent down. Most of the people in these groups go with a 35-year amortization.
"People want to own property, and from the affordability standpoint they have to go this route," Mr. Loleski said.
Cue the anxiety about a real estate bubble. The ultimate nightmare is that when interest rates rise, maxed-out home buyers will default on their mortgages and other debts. Next step: The housing market plunges, taking the economy down with it.
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That's how it played out in the United States, and the big banks are worried enough about a repeat in Canada that they've asked Ottawa to increase the minimum down payment to 10 per cent and shorten the maximum amortization period to 30 years. But other moves are being contemplated. One possibility is a tightening of lending requirements for people who take variable-rate mortgages, to ensure they could handle an interest rate increase.
The latter is the right approach. If we're worried about a housing bubble, let's get tougher in ensuring people can afford to carry the mortgage debt they're taking on. All you get from tightening minimum down payments and amortization requirements is a lot of people regulated out of the housing market.
"Your ability and willingness to repay are by the far the most significant factors," said Robert McLister, a mortgage planner and co-editor of the Canadian Mortgage Trends blog.
Mr. McLister said down payment size is a lesser factor in determining a borrower's risk profile, and he says the amortization period is virtually irrelevant. "I can't understand how amortization is so much in the news headlines," he said.
Mortgage rates remain close to historical lows, but the cost of buying a house at the end of 2009 was up about 19 per cent from what it was at the end of 2008, with an average price of $332,461.
At first glance, the $16,623 required for the minimum 5-per-cent down payment doesn't sound too steep. But mortgage default insurance would add close to $8,700. Add closing costs and moving costs and you're looking at $35,000 to get into an average-priced home with just 5 per cent down.
And then there are the extra costs of owning a home versus renting. Between upkeep, utility bills, property taxes and just buying stuff, you're certain to have much higher expenses.
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This explains the heavy preference for 35-year mortgages among first-time buyers. By stretching out the payback period, you can reduce the amount of your scheduled mortgage payments.
