Say goodbye to 40-year mortgages!

ELLEN ROSEMAN 
The 40-year mortgage, launched just over two years ago, will probably expire in October.

Back in April 2006, Genworth Financial Canada was the first to insure residential mortgages in Ontario that were paid back over 40 years.

Soon, all of Canada’s mortgage insurers will have to underwrite mortgages paid back over 35 years at most. Ottawa is not killing the long-payback loan because it sees a U.S.-style housing bust coming to Canada.

Canadian financial institutions have been conservative in their lending, says a finance department background paper.

And subprime mortgages make up less than 5 per cent of new loans issued in recent years.

A more urgent reason is to protect taxpayers – you and me – from possible losses if too many stretched borrowers default on their 40-year mortgages.

The federal government is on the hook financially because it guarantees 100 per cent of the mortgage insurance claims paid by Canada Mortgage and Housing Corp., a Crown corporation.

It also stands behind the claims paid by CMHC’s private-sector rivals, such as Genworth.

Ottawa backstops 90 per cent of private mortgage insurers’ claims to make it possible for them to compete effectively with CMHC.

Mortgage insurance is a lucrative business. Residential buyers with less than a 20 per cent down payment must buy a policy, which protects lenders against default.

The average Canadian will pay only $55 a month more by taking out a 35-year mortgage instead of a 40-year loan, estimates Pascal Gauthier, an economist with TD Bank Financial Group.

“It’s just optics,” he says.

But other rules unveiled Wednesday could make it harder for first-time buyers to qualify for government-insured mortgages.

Borrowers will have to make a 5 per cent down payment instead of financing the entire house price.

They can still borrow the 5 per cent with a line of credit, but “it will not be insured under the new guarantee framework,” the finance department says.

Requiring buyers to put down 5 per cent of the purchase price in cash will have a bigger impact than the vanishing 40-year mortgage, says Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals.

Borrowers will also need a minimum credit score of 620 to qualify for a government-insured mortgage.

A credit score – also called a Beacon score or a FICO score (after Fair Isaac Corp. ) – is a numerical value that measures a borrower’s risk based on a statistical evaluation of information in their record.

The minimum credit score now used for government-insured mortgages is less than than 620, says a Toronto mortgage broker.

“The lender looks at all the circumstances, and getting a deal approved with a credit score of 580 has been pretty standard,” says John Cocomile of Greedy Mortgage. “This, of course, is assuming solid employment, a strong co-signer or other factors that make the deal sensible.”

Mortgage broker Jim Rawson, Toronto regional manager of Invis Inc., is glad to see tougher rules coming into force.

“It’s the right thing to do,” he says. “Our business won’t be affected that much.

“If you can’t afford to pay an extra $50 or $60 a month, you probably shouldn’t be buying a house.”