Posted by: Daryl & Wendy Ashby | December 1, 2010

Asset Bubbles

TD Bank CEO, Ed Clark, says the government should cut the maximum mortgage amortization from 35 years to 25 years.

“We see a world in which low interest rates and excess liquidity has created asset bubbles all over the world,” Clark told reporters last week.

“We don’t have a problem here, but why are we not making sure we don’t create a problem?”

Clark says Canadians have been following a policy of: “Don’t save. Take a longer period to spread out your payments.”

“I don’t think that’s good public policy,” Clark feels.

The idea of reducing amortizations has been floated before, most recently this year when it was speculated that the Finance Department might cut the maximum amortization to 25 years.

The government last changed amortizations two years ago. At that time, they were cut back from 40-years to 35-years on high-ratio mortgages.

Despite all the debate, no one has ever provided public data (that we’re aware of) to show that 35-year amortizations create undue risk in the market. Insurers charge just a 0.40% higher premium on a 35-year amortization. That means something, because insurers are actuarial experts. They know default ratios better than anyone in Canada. None of them have indicated any public concern for extended ams.

Restricting choices for intelligent highly-qualified Canadian borrowers doesn’t make much sense. People with great credit and solid employment need the right to manage their cash-flow without government intervention (within reason of course). So do highly qualified borrowers in high-priced locations, or those buying investment properties.

In almost all cases, people who take 35-year amortizations plan to pay off their mortgage much quicker. In fact, the average Canadian gets rid of their mortgage in 1/2 to 2/3 of their original amortization, according to insurer sources. In other words, due to pre-payments, people pay off their 35-year mortgages in far less than 35 years.


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