Long-term and zero-down options can make owning easier, but there may be a downside
Fiona Anderson
Sun
Jo Tortora, mortgage specialist for the Bank of Montreal, discusses various mortgage options with a customer. Photograph by : Glenn Baglo, Vancouver Sun
Innovative new mortgage packages are making owning a home easier, at least in theory. But in practice, financial institutions are taking a cautious approach to when, and if, they will grant long-term or zero-down mortgages.
In March, Canada Housing and Mortgage Corp. — which insures mortgages with only a five-per-cent downpayment — announced it would guarantee 30-year mortgages, up from the traditional 25 years. Shortly afterwards, Canada’s other mortgage insurer, Genworth Financial, upped the ante to 35 years.
But banks have been slow to jump on the bandwagon.
BMO Bank of Montreal, RBC Royal Bank and Vancity have all said they currently do not have residential mortgages beyond 25 years, although they were all looking into such an option. The main consideration was whether it would be suitable for customers.
BMO mortgage manager Jo Tortora doesn’t understand why anyone would want a longer-term mortgage.
“I don’t think it’s to the benefit of clients, because it is really just compounding their interest for a longer time,” Tortora said. “The bank’s making extra interest, but for the client, the change in payment from a 25- to a 30-year mortgage is marginal.”
The monthly payment on a $100,000 mortgage at 5.5 per cent interest amortized over 25 years is $614.09. For a 30-year term the payment is $567.79.
“Look at what you’ve done to yourself,” Tortora said. “For $40 you’ve bought yourself five extra years of debt and payments.”
Kevin Lutz, RBC’s regional manager of mortgage specialists, agreed a 30-year amortization might not be right for every customer.
For people trying to bring down their payments it might be the right product, but if you can afford a 25-year amortization you should take it, Lutz said.
“And that’s probably what we’ll encourage should we adopt a 30-year mortgage,” he said.
Vancity is looking at how to “position [the mortgage] so it enables people to get into the market, but not into debt beyond their means,” Vancity’s product manager, Marjorie Robertson, said.
Interest rates are still relatively low, she said. But when it’s time to renew the mortgage in five years, very little of the principle will have been paid off on a longer-term mortgage, so customers may end up with quite a large payment increase if rates are higher, she said.
Vancity is looking at ways of mitigating those concerns, she said.
There are, however, other new mortgage products that may help homebuyers. Last year, RBC introduced its Homeline plan, which allows a buyer to divide a mortgage into as many as five parts, each with different terms and including both variable and fixed rates.
“It’s a great product to hedge where you think interest rates are going to go,” Lutz said.
RBC also has zero-downpayment mortgages, but there are very few of those, Lutz said.
“Most folks find the resources to come up with that five-per-cent downpayment,” he said.
Steve Moffitt, a senior mortgage consultant with Equimac Mortgage Centre, agrees that very few people are taking out 100-per-cent mortgages.
As CMHC and Genworth only insure mortgages up to 95 per cent, the banks kick in the other five per cent, Moffitt said. But banks increase the rate over the first five-year term to recoup that money. Where a conventional mortgage may charge 4.9 per cent interest, the zero-down mortgage could be 6.3 per cent, Moffit said. So potential purchasers get “sticker shock” when they see the interest rate and tend to find the downpayment, he said.
But 30- and 35-year mortgages are now available through “wholesale lenders,” Moffitt said.
A new product from Vancity is opening the door to homeownership for society’s most unlikely homeowners — people in subsidized housing. The springboard program will provide 100-per-cent financing, at a fixed low rate, to people who have paid their rent on time for at least two years and have verifiable income, said Elisabeth Geller, Vancity’s manager of community and environment programs. The program is part of Vancity’s long tradition of “banking on the unbankable,” Geller said.
To make monthly payments manageable, 20 per cent of the loan will be interest fee, while the remaining 80 per cent will require interest payments only, stretched over a 10-year period. After the 10 years are up, the owners can apply for a conventional mortgage.
The amount is capped at $200,000, so although the program is available to anyone who lives in non-profit housing wherever Vancity does business — the Lower Mainland, the Fraser Valley, and Victoria — it is unlikely to apply to people wanting to buy in Vancouver, where prices are significantly higher than that, Geller said.
“The initial target for this is the Fraser Valley and the Tri-Cities,” Geller said.
Vancity won’t be making money on these mortgages, but it hopes to reap the benefits down the road when the new purchasers renew their mortgages, Geller said.
“For 60 years Vancity’s bread and butter has been residential mortgages,” Geller said. “Vancity started 60 years ago, when no bank would give a mortgage east of Main Street. So when Vancity started in 1946, it said we’re going to be the first financial institution to lend money for people to buy homes east of Main Street. That’s the kind of foundation and innovation that we’ve wanted to make sure we don’t lose sight of over 60 years.”
But what potential home-buyers should really be looking at is not what new products are out there but what products, new or old, suit them and their cash-flow, Tortora said.
People who want to get into the market may want to consider buying houses in places that are still affordable and renting them out, instead of buying a home they can’t really afford, Tortora said.
It gets people into the market, it enables them to build up equity, yet it is still manageable from a cash-flow perspective.
A mortgage should be an asset not a ball and chain, Tortora said.
PAYING DOWN THE MORTGAGE
Canada Mortgage and Housing Corp. now guarantees 30-year mortgages, while Genworth Capital has gone one step further, taking on 35-year mortgages. With a fixed interest rate of 5.5 per cent, this is how much will be paid off for a $100,000 mortgage after five years:
Term Monthly payment Balance Outstanding after five years
25 years $614.09 $89,271.35
30 years $567.79 $92,460.47
35 years $537.02 $94,579.95
© The Vancouver Sun 2006