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TD Economics

HIGHLIGHTS OF THE WEEK

United States

• The Federal Reserve committed to keep rates on hold through the end of 2014 this week, while today’s Q4 GDP released underscored the fragility of the economic recovery. Unfortunately, further monetary easing isn’t what is going to provide the jolt the economy needs.
• What’s holding the economy back right now isn’t the price of credit; it’s the lack of quality borrowers. The pool of potential borrowers willing and able to take advantage of lower interest rates is limited. And as long as aggregate demand remains depressed, businesses will continue to put off investing until the economic outlook improves.
• What the economy needs right now is more effective fiscal policy solutions. However, fiscal policy so far has tended to undermine the recovery rather than aid it.

Canada

• With the U.S. Federal Reserve on hold until 2014, we expect the Bank of Canada to leave its key overnight rate unchanged until mid-2013. In addition to this delayed start, we now forecast that the return to the neutral interest rate will take place over a longer period of time.
• The revised interest rate outlook led the loonie to break through parity versus the greenback for the first time since November. Canadian bond yields also fell across the curve.
• The lower-for-longer interest rate profile implies an upward risk to our near-term domestic economic outlook. At the same time, households are already heavily indebted and the national real estate mar­ket is overvalued by roughly 10-15%. If both measures continue to ramp up in the presence of low interest rates, they will become heightened downside risks to the medium-term economic outlook

There has been a lot of press coverage over the past couple of weeks concerning amount of debt incurred by Canadian households and the possibility of the real estate market being over valued in some areas.   Some of the commentary is making reference to 25 year amortizations on mortgages,  you may recall the government regulators required the financial institutions to reduce amortizations from 35 to 30 years in April of 2011.  

I though you might be interested to see what effect this would have on a borrower’s purchasing power if the amortizations were reduced from 30 years down to 25 years.  

Here are the key implications:

• Per the tables below, an increase in annual income of  approx. $10,000.00 is required to qualify for the 95% mortgage based on a purchase price of $489,900.00
• Using income of $85,000.00 as the annual family income,  the purchaser would qualify for a mortgage of approx. $55,000.00 less  with a 25 year amortized mortgage compared to a 30 year amortized mortgage.  A bit shift downwards in the purchaser’s buying power for sure.

Table 1  Income required to qualify on a purchase of $489,900.00 with the respective down payments noted below at 3.29% for a five year fixed term with 30 year amortization

Table 2 Income required to qualify on a purchase of $489,900.00 with the respective down payments noted below at 3.29% for a five year fixed term with 25 year amortization.

Trademarks owned or controlled by the Canadian Real Estate Association. Used under licence.