British Columbians make long committments to mortgages

When talking mortgages, 40 is the new 25. Less than two years ago, the longest amortization period for mortgages was 25 years. And that's what most first-time buyers in British Columbia were opting for, as skyrocketing real estate prices translated into hefty monthly payments, even when spread over 25 years.

Then as house prices continued to climb, banks and other lenders stretched amortization periods first to 30 years, and then to 40 years, softening the monthly blow of home ownership. Today, the 40-year mortgage is now the norm among first-time buyers and common among other buyers as well. And with British Columbians anxious to own homes, B.C. has become the most mortgage-laden province in the country.

Feisal Panjwani, a senior mortgage consultant with Invis in Cloverdale, estimates that 95 per cent of his first-time clients are going long-term with 40. There are also zero-down mortgages and an interest-only mortgage that help them get into the market, he said.

Panjwani likes the 40-year mortgage because it allows flexibility with a safety net. If borrowers can afford to top up the payments they can, but if something happens and they can only make the minimum payment, that's okay, too.

But without extra payments, not much equity builds up in the early days. For example, for a $300,000 mortgage at six per cent, less than $11,000 is paid off in the first five years of a 40-year mortgage, compared to more than $30,000 for the shorter 25-year mortgage. And part of the money owing on the longer option will go toward increased insurance costs which rise from 2.75 per cent for a 25-year mortgage with five per cent down to 3.35 per cent for a similar 40-year mortgage, Panjwani said.

But the monthly payments of $1,635 compared to $1,919 make the 40-year option the only affordable choice for many first-timers.

With B.C.'s high prices, more British Columbians than other Canadians are taking out 40-year mortgages, said Kevin Lutz, RBC Royal Bank's regional sales manager, mortgages. British Columbians also take on more high-ratio or low down payment mortgages than the rest of the country.

The federal government's Home Buyers' Plan offers no relief. Despite the fact that house prices in B.C. have doubled in the past five years, the plan still only allows a first-time buyer to take a maximum of $20,000 out of his registered retirement savings plan.

So as prices in the province rise, and buyers rise to the bait, what is really going up is the amount of mortgage debt British Columbians carry.

According to statistics released by the Bank of Canada, British Columbians carry 19 per cent of the country's mortgage debt, yet represent only 13 per cent of the population and 13 per cent of the country's disposable income, Doug Porter, deputy chief economist with BMO Capital Markets said in an interview.

"When people talk about the potential risk of outsized household debt it's probably most acute in B.C.," Porter said.

And if problems arise in the housing market as they have in the United States, the large mortgages could be a problem, he said.

But Porter believes the economy in B.C. should remain strong and that B.C. is not headed "for a U.S.-style reversal of fortune."

But the only people who have benefited from the increase in amortization periods are pre-existing home owners who saw their house prices bump up as a result, he said.

"It really doesn't improve the long-term affordability at all," Porter said.

It could spell trouble, however, if banks stopped offering the new mortgage options, said Andrey Pavlov, an associate professor of finance at Simon Fraser University. Because just as the new mortgages pushed up prices, no longer offering them would cause a drop in prices, Pavlov said. And that's essentially what's happening in the U.S.

On an individual basis, Pavlov said, it's not necessarily a poor decision if someone buys a house they couldn't afford with a conventional mortgage.

"All it says is that person is willing to forego a lot of other consumption to live in that house."

Margaret Johnson, president of Solutions Credit Counselling Service Inc. in Surrey, worries that some first time buyers can't really afford to buy a house, even if lenders say they can.

So while they may get parents to ante up the down payment, the monthly slog may prove to be too much especially when things go wrong and need fixing, Johnson said.

Forty-year mortgages are allowing people to get into the housing market "but I don't know how long it's going to allow them to remain in the housing market if anything happens," Johnson said.

(prepared by Fiona Anderson/Vancouver Sun)