The Great Mortgage Reset

1 – BRING BACK THE 40 YEAR AMORTIZATION MORTGAGE. 

And before the critics start blasting me, just hear me out.  In May 2023, I had the privilege of hearing our former Bank of Canada governor, Stephen Poloz, speak to a small group of which I was a part of.  I’ll never forget what he said. He would support a 40 year and even a 50 year amortization mortgage. Why?  It would make our monthly cost of living go down. He said we need to get away from this idea of having a home paid off in 25 years.  His example: even if a home is 1/3rd paid off at your retirement age, you will still have plenty of equity to retire on. Remember, that’s coming from the former Bank of Canada Governor.

Remember in that earlier example of the average couple earning $128,000 annually qualifying for a $543,000 mortgage?  Using a 40 year amortization they would qualify for $624,000.  Increase that income to $150,000 and that figure goes up to $745,000.  

Young Canadians starting out will earn more as they get older. This is just a normal progression. We need to stop pretending that someone that is 28 years old will be earning the same income level when they are 38 years old.  Incomes go up. We need to start factoring this into lending policies. 

2 – ELIMINATE THE STRESS TEST ON FIXED RATE MORTGAGE OF 5 YEARS OR LONGER.  

We don’t need to stress test people that take a 5 year fixed rate.  I’ll show you why.  Did you know that at the end of a 5 year term, your payment doesn’t double?  It goes up by around 45%  Using a $543,000 mortgage @ 4.69% with a 25 year amortization gives you a payment of $3,063/mth means you’ll owe $478,222 in 5 years.  If your rate were to double in 5 years, your monthly payment would increase to $4,365.  Sure, nobody wants that but it’s nowhere near double your original rate. And for most of us, our incomes will have increased, perhaps we’ve built some equity in our homes.  The point being that we never had a stress test before. This all started in 2010 as a reaction to the US subprime mortgage crisis.  

Canadian banks suffered almost no losses. Our mortgage lending practices have been sound and solid for generations.  We can be proud of this.  

3 – REDUCE CMHC INSURANCE PREMIUMS. 

A simple fix. Premiums used to be as low as 2.75% of the mortgage on someone putting 5% down.. Today, they are 4.00%.. That’s right. You have to add 4.00% as a one time cost to your mortgage. Not a bad profit, eh?  (CMHC is a crown corporation that was created in 1946 to help veterans find housing. Since then, it’s mandate has been modified but the goal is the same. To help Canadians find housing.. Somewhere along the way, it became a profit center earning from $1billion to $2billion annually).

4 – ALLOW CANADIAN TO BUY RENTAL PROPERTIES WITH LESS THAN 20% DOWN.

Why?  We have a serious supply problem. Corporate property owners don’t want to invest in purpose built rental apartments due to the rent control rules, which limit how much they can increase their rent by, and also due to the unfair rules that give tenants more rights than landlords.  The perception is that somehow, anyone that owns a rental property is super rich, unfair and greedy money grabbing Scrooge.  We have so many private citizens flocking to short term rental property investments as a way of not having to fall under the landlord and tenant tribunals.  We should encourage private rental property ownership (by the way, Airbnb type rental properties are not the problem.. They only account for less than 1.00% or 100,000 of 15 million housing units in Canada.  Airbnb and short term rentals are not the problem, but they sure make for a good media clip).

5 – REVERT BACK TO EASIER QUALIFYING RULES. 

This is one topic that I can write an entire article on and perhaps I will.  Banks, Trust companies and most other primary lenders have been forced to make it very difficult for private individuals to qualify for an investment property due to the qualifying rules becoming so strict.  Just 20 years ago, with as little as 10% down, you could buy a rental property with a 1st and 2nd mortgage and the rents would either cover all expenses or it would be very close. 

6 – GET RID OF RENT CONTROL RULES.

7 – SELF-EMPLOYED AND COMMISSIONED PEOPLE.

You are treated like a second class citizen. Here’s another set of handcuffs the government has thrown on us. 

Did you know that salaried employees qualify for around 20% to 30% more mortgage money than self-employed people? Yes, those ‘tax cheats’, as some in our current government so infamously referred to our Canadian entrepreneurs and business owners.  

What else can one think? 

Check this out.  All financial institutions will only use a self employed person’s net after tax personal income to qualify for a mortgage.   Here’s what that looks like and how it’s different from a salaried employee.

Let’s use a fictional company owned by John Henry called ABC Windows and Doors. The company does well with gross sales of $800,000 a year. His cost of goods, salaries, rents, operating costs total $500,000. The owner pays himself a $100,000 annual salary.  After income taxes, his net income on line 150 of his personal tax return is $80,000.   

His business income after taxes is another $150,000 (this is money that he doesn’t need immediate access to and can leave in the company until he needs it… usually, most business owners will only access this if urgently needed or at retirement or if business is slow… and remember, he’s paying tax on whatever business income he is earning each year).  

So, how much income do you think the Banks will use to qualify him on a mortgage?   $250k? $230k? ..Nope.  They will use just $80,000.  That’s right. So, the self-employed person has to put a much bigger down payment, or go to a secondary lender with higher rates.   And this isn’t anything new. Banks and all other mainstream mortgage lenders will only use personal income after tax that is showing on  line 150 of the self-employed individual’s tax return to qualify for a mortgage.   The new 4.5x rule I mentioned earlier would handcuff this borrower and limit him to getting a mortgage of up to $360k.  

We need to change this rule immediately.  Just so you know, in years past, the general rule of mortgage lending was always as follows..  If someone is putting a down payment of 35% or more, has decent credit, then give them the money.. They will almost never risk defaulting with such a large investment.  This rule has been around for well over 60 years.. But somehow, we needed to change it…

Conclusion…