Mortgage holders caught by declining real estate values

Despite significant financial knowhow, Kelowna mortgage broker Scott Peckford is among the countless number of 30-somethings snared into long-term debt, via home owning ambitions.

Despite significant financial knowhow, Kelowna mortgage broker Scott Peckford is among the countless number of 30-somethings snared into long-term debt, via home owning ambitions.

“I bought my house in the middle of the boom, and now I’m three years into a 40 year term,” he said, pointing out that the equity in the property has dropped since he bought in.

“I know now I won’t be able to get out of my house for another 10years at least—I’d lose my shirt—but it’s fine because it’s my home. “

Peckford also had a decent sized downpayment, removing him for the ranks of many other new homeowners, but not everyone is positioned so well and it’s becoming an impediment.

“A lot of people are screwed. They have zero equity and 40 years of debt and so (they) can’t negotiate with their bank,” he said, explaining it’s something a person may want to do to adjust their lending rate in their favour.

It’s a vastly different reality from the days before the housing market went south along with the rest of the economy, and as budgets tightened concerns about debt load among Canadians continued to be an issue.

So much so that Finance Minister Jim Flaherty has twice implemented measures he said will “protect the stability of the economy.”

The most recent occurred last month. Following a warning from the Bank of Canada that Canadians’ domestic debt burden is the highest on record, Flaherty announced three new rules for the mortgage industry that come into effect March 18:

• Mortgage amortization periods will be reduced from 35 years to 30 years.

• The maximum amount Canadians can borrow to refinance their mortgages will be lowered from 90 per cent to 85 per cent of the value of their homes.

• The government will withdraw its insurance backing on lines of credit secured on homes, such as home equity lines of credit.

While some view the changes unfavourably, for reducing new home buyers access to the market, Peckford is in support of them.

In fact, from his view, his clients would do better from even stricter policies.

“I bet (the government) will bring the amortization period down to 25 years in the future,” he said, pointing out he wouldn’t be comfortable granting a mortgage to a client who couldn’t meet the debtload of the 25 year lending term.

“Until 2006 mortgages over 25 years needed to have five per cent down. Then they changed it to 40 —it was like the government increased the speed limit on the highway, then realized Canadians were horrible drivers and had to rewind.”

As the government rewinds, however, real estate groups across the country are encouraging buyers to take advantage of the remaining days of the 30 year mortgage.

“Consumers who have been sitting on the fence should be encouraged to make a move while 35?year mortgages and record low mortgage rates are still available,” said Brenda Moshansky, OMREB president and a Kelowna realtor.

“Plenty of choice, attractive home prices, and low mortgage rates continue to provide the best incentive to buy now rather than later when prices will begin to trend higher and interest rates increase.”

Peckford who is also the author of a new finance book called How to Rob Your Bank is loath to hand out that kind of encouragement.

By his estimates, a buyer who qualifies for a maximum of $300,000 will only qualify for $278,000 after March 18, which is just over a seven per cent reduction in buying power.

And, more than anything, it’s seven per cent some should feel better about leaving behind.

“Any time you’re going to spend $300,000 and you only have three weeks to do it, you should be careful,” he said.

“It’s not like buying a TV. It’s kind of a big deal.”