Comments on: House Price Index, Mortgage Arrears, Affordability & More

By: Jimmy

Jimmy — Sat, 28 Nov 2009 00:29:15 +0000

I think when rates get low there is a natural push to get a longer amortization. Like vlad says, a rational investor can get a better return on many investments than the current interest rates so why not take advantage of the cheap money. Of course we’ll find out who gets caught on this only when rates increase..

With 10 year bonds back to 3.2 ish that’s still aways off. It made me laugh to hear that Dubai is defaulting so people are rushing to the US dollar this morning

By: Vladimir Levin

Vladimir Levin — Fri, 27 Nov 2009 17:14:23 +0000

I suspect there would be a decline in prices. The big question is, of the people who are taking 35 year mortgages, how many of them wouldn’t buy the house otherwise. I do know some people who are in long-term mortgages simply because they don’t want to take cash out of their investments…

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Mike Fotiou says: It’s true, not everyone that utilizes extended amortizations do so out of necessity to qualify or afford payments. But consider how much interest is payable for an extra 10-15 years of carrying a mortgage:

Example: A $400,000 mortgage, with a 25 year amortization, with a 5% interest rate (across the entire 25 years, of course not likely, but for purposes of simplification) paid weekly would result in total interest charges of $293,446.

The same scenario above, but with a 35 year amortization would result in total interest of $434,079.

Cut it back to a 20 year amortization, and total interest would be $227,626.

By: Mike Fotiou

Mike Fotiou — Fri, 27 Nov 2009 05:29:46 +0000

Robert McLister from Canadian Mortgage Trends interviewed on BNN yesterday: view clip

I read their blog regularly – great information, very knowledgeable.

The clip has a good discussion regarding fixed/variable rates, planning ahead for higher rates and risk tolerance, and what to look for in a mortgage.

However, near the beginning at around 0:45, there’s a little talk about a housing bubble. 47% of mortgages for new purchases in the past year had amortizations longer than 25 years, and of those 47%, 60% were for 35 and 40 year mortgages.

There was one part where I thought host Andrew Bell was quite lenient and didn’t push the issue.

Robert: “Do 35 year amortizations, are they causing a problem right now? They’re definitely leading to some type of inflated price amount, I don’t know what that is, but it’s something. But they’re going be priced in at some point just like the 5% down programs where after they came out in 1998. ”

Andrew: “What do you mean priced in?”

Robert: “Priced into the market, into home prices. So it’s gonna get to a point where, ok, there’s a lot of people using 35 year ams to buy a house. It’s going to get to a point where that’s reflected in home prices. Then you’re going to have to ask yourself, ok well do I want to take 35 year amortizations away from the market at this point after prices have already gone up.”

Andrew: “And that obviously could torpedo the market or make it deflate-”

Robert: “It would make it a lot harder to buy a home for some people.”

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What do you think?

Do you think 35 year amortizations will be taken away if this trend continues? If they were taken away, would the market deflate or would it just result in less people being able to purchase homes?