It's not the mortgages, it's the borrowers

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.

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.

Is this a good time to lock in or refinance your mortgage?

"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.

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.

Jas Grewal, a mortgage broker with The Mortgage Centre in Toronto, said most of his clients who go for the low down payment and maximum amortization can afford to pay more than they are. But in a weak economy where layoffs or reduced work hours are a risk, they like the flexibility they get with lower payments.

Mr. Grewal said people can easily reduce a 35-year repayment schedule by making regular lump-sum payments against their principal, or increasing their scheduled payments.

Certainly, borrowers have every intention of paying off their mortgages early. "I haven't come across a client who says, 'No, I'll just keep my mortgage going for 35 years,' " Mr. Loleski said.

But he also noted how difficult it can be to carve cash out of your family income to make extra mortgage payments.

The longer you take to repay your mortgage, the more money you squander on interest charges. But that's your problem. In terms of the stability of the housing market and the broader financial system, what matters is your ability to keep paying what you owe and not default. Some research commissioned by the Canadian Association of Accredited Mortgage Professionals offers some cause for optimism here.

More on debt:

The study found that total household debt accounted for 32.3 per cent of income, which compares to a usual lending limit of 42 to 44 per cent. It's financially-stretched homeowners who are up against the debt ceiling that the government should worry about, Mr. Grewal said.

"The risk is for people who have a 5-per-cent down payment and a 35-year amortization and they're barely keeping up," Mr. Grewal said. "That's a risk the government should be concerned about, but that is not the majority of clients out there."

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Low and long

Here's what several mortgage brokers have to say about the extent to which their clients are making the minimum 5-per-cent down payment and using the maximum 35-year amortization.

Kim Arnold, Dreyer Group Mortgages (Vancouver)

90 per cent of first-time buyers go for 35-year amortizations 90 per cent of these buyers are putting down 10 per cent or less

Mike Loleski, Homefund Corp. (Toronto)

Most clients putting 5 or 10 per cent down go with 35 years

41.7 per cent of first-time buyers going with 5 per cent down

Peter Majthenyi, Mortgage Architects

(Toronto)

A majority of clients going with the 35-year amortization

Two- thirds of first-time buyers going with 5 per cent down

John Panagakos, The Mortgage Centre

(Toronto)

60 to 70 per cent of clients are going with a 35-year amortization

25 to 35 per cent of clients are going with 5 per cent down

Jim Tourloukis, Verico Advent Mortgage Services

(Unionville, Ont.)

A 50-50 split between 25- and 35-year amortizations, no one goes 30 years

20 per cent of clients go with 5 per cent down