Fail

Start with the math.

Let’s buy a fresh-build, modest $1.2 million house – a townhouse, actually – in suburban Vancouver. The newbie buyers have been able to save a hundred grand. Good on them. The Bank of Mom ponies up the rest, so Todd and Amanda can plunk down 20%, avoiding CMHC insurance.

That leaves a seven-figure mortgage. The bank says they qualify. Then they hear what the federal finance minister just did. The kiddos can arrange a 30-year mortgage, since their closing day is not until the autumn (the development is still being framed).

Should they?

Well, a $1 million home loan at the current bank rate of 5.6% (five-year fixed) with a 25-year amortization costs $6,162 a month. Plus strata fees, property taxes, insurance, utilities and decorating. Ouch. So they explore the 30-year option, and discover that will lower the monthly to $5,700. Still brutal, however four hundred bucks less.

But wait. Borrowing for longer may save monthly – at what cost?

If Todd and Amanda go with the 25-year mortgage, this is the scorecard after five years:

Total payments made: $369,735
Interest paid: $262,971
Principal repaid: $106,763
Mortgage that remains: $893,236

Here’s the situation if the couple opts for a 30-year loan and lower monthlies:

Total payments made: $342,021
Interest paid: $267,100
Principal repaid: $74,920
Mortgage that remains: $925,079

In short, over 60 payments Todd and Amanda will shell out $27,714 less in total to carry the mortgage. But after five years they will owe $31,893 more. Over the life of the mortgage, interest on a 25-year mortgage is $848,675. On a 30-year loan that jumps to $1,052,125.

So, if two hundred grand doesn’t mean whole lot to you, go ahead. Do what Chrystia wants.

By the way, the homebuilders want this bad – which is why Ottawa agreed. They both figure if l-o-n-g mortgages are offered on new homes more young couples will buy one, and this pathetic effort (so far) to build a bazillion new houses will finally take off. (As we all know, government does not build market housing, and developers aren’t going to risk doing it until a sales order has been signed.)

Of course, encouraging more people to buy means more demand. And in the real estate business, that almost always means prices can elevate. Is that really what we want when RBC has just declared housing affordability to be the worst ever? Not a chance.

The other big tamale from the feds this week is a giant boost to the RRSP Home Buyer’s Plan. Effective Tuesday people can rob their retirement plans of $60,000, tax-free, for a down payment. That means during their tenure the Libs have increased this limit by 140%. Together couples could access $120,000 – and they don’t need to start putting it back into their RRSPs for five years (up from two). After that, then get 15 more years to fully restore the money – or it gets added to taxable income.

This is an even worse idea than 30-year ams.

It, also, is designed to increase demand. Bad. It encourages people to gut their retirement savings at a time when corporate pensions are being punted. Bad. It means a big chunk of retirement money misses up to 20 years of growth and compounding inside the tax shelter. Very bad. And it’s a meaningless gesture which will not make real estate affordable, since most new buyers don’t have that kind of dough to start with. Stats show only a sliver of buyers make use of the existing $35,000-per-person RRSP grab. So why would goosing the limit change that?

Oh, and the minister’s diddling with banks and folks who already borrowed too much and are dangling, too. Extended temporary amortizations on mortgages which people foolishly took with variable rates will now be made permanent, she says, if there is ‘financial distress’. Freeland adds that “depending on a homeowner’s circumstances,” the amortization can be fixed, even with insured mortgages. And banks will not be able to claim any fees or penalties.

In short, if you wish to pay excessive interest, access money you don’t have, put more pressure on home prices or be absolved from your own reckless, irresponsible borrowing, the feds have your back.

So, everything should be fine now. Feel better?

About the picture: “Took this picture for you while we were in Government House in Victoria,” writes Michael, the famous film and TV producer. “I don’t know his or her story sadly.  The pooch was kept behind doors so not to interfere with my group casing the hallways. We were scouting the building for a possible location to be used in a movie. The pooch was excited to see us all and welcome us to its wing of the home through the glass door. Living large and very cute! Cheers, and thank you and your team for all that you do!”

To be in touch or send a picture of yuor regal beast, email to ‘[email protected]’.