A recent report
discussed some ways in which the adverse effects of over extending credit and
over valued assets can effectively be overcome in a low interest climate.
The suggested decrease in mortgage amortization periods from
a maximum of 35 to 25 years seems a bit extreme. A better idea would be to
reduce the maximum amortization (as allowed during mortgage qualification) by a
year on an annual basis. This will not only make the mortgage less risky but
also not have a negative impact on the housing market. An alternative would be
to impose a limit on an extended amortization to good credit borrowers, those
with a score of 650 or more. This will ensure that the longer amortization
risks are taken only by borrowers with a good credit repayment history.
For the greater good of the housing market, an effective
solution would be to do away with the 5% mortgage cash backs in cases where the
mortgage lender
provides financing that equals 95% of the property’s value.
CMHC (Canada Mortgage and Housing Corporation), in October
’08, decided to stop insuring mortgages that did not have any down payments (minimum
down payment being 5% of the property’s value). However, following this change,
most lenders, including the big five Canadian banks, introduced mortgage
products that offered a 5% cash back to borrowers in return for a 95%
financing.
A minimum 5% down payment is not a big thing to ask of
borrowers looking to become future home owners. Adopting this middle ground and
a smarter approach to mortgage lending can put concerns of mounting household
debt to rest.
