By Tara Perkins – Globe and Mail

Cana­di­ans are flock­ing to 40-year mort­gages, often with­out a down pay­ment, and the rapidly devel­op­ing trend is begin­ning to ring alarm bells for pol­icy mak­ers in Ottawa.

Both the Finance Min­is­ter and the Gov­er­nor of the Bank of Canada are express­ing con­cern about the sit­u­a­tion, as the U.S. econ­omy con­tin­ues to reel from a cri­sis trig­gered by mort­gage hold­ers who were in over their heads.

“We’ve seen an incli­na­tion now, a trend, toward longer-term amor­ti­za­tions and smaller down pay­ments, and that is a mat­ter of some con­cern,” Finance Min­is­ter Jim Fla­herty said yesterday.

Forty-year mort­gages have only been avail­able here since late 2006. Anthony De Almeida, chief exec­u­tive offi­cer of the Cana­dian Equity Group Inc., esti­mates that 25 to 30% of home buy­ers are now ask­ing for them.

One banker from a large Cana­dian bank said the major­ity of new mort­gages it is doing are now for 40-year terms.

“Over the next cou­ple of years, you’re going to see more and more peo­ple uti­liz­ing the 40-year amor­ti­za­tion, just because it low­ers your ini­tial mort­gage pay­ments,” Mr. De Almeida said.

Growth is rapid. Last year, only 9% of out­stand­ing mort­gages were for terms longer than 25 years, but 37% of all new mort­gages were, said Jim Mur­phy, chief exec­u­tive of the Cana­dian Asso­ci­a­tion of Accred­ited Mort­gage Pro­fes­sion­als.

What is really trou­bling some pol­icy mak­ers and econ­o­mists is the use of long-term mort­gages with lit­tle or no equity. No-money-down mort­gages “really came out of the gate about five years ago,” and now at least one-third of first-time buy­ers toy with the option, Mr. De Almeida said. He esti­mates 15 to 20% of first-time buy­ers are tak­ing out 40-year mort­gages with­out a down payment.

There is con­cern that a one-time rise in real estate prices could result if the bulk of Cana­di­ans get into longer-term mort­gages, said Dou­glas Porter, deputy chief econ­o­mist at BMO Nes­bitt Burns.

“Any kind of a shift in lend­ing prac­tices that makes it more afford­able for every­one will basi­cally just drive up the price,” he said. “The other con­cern is that it could be lead­ing to a sit­u­a­tion where peo­ple are pay­ing a lot more inter­est over the entire term of the mort­gage than they oth­er­wise would, and it could ulti­mately weaken house­hold finances.”

Cana­dian con­sumers as a group could have less net sav­ings down the road because many will still be pay­ing off mort­gages later in life, he added.

Bank of Canada Gov­er­nor Mark Car­ney recently told the Com­mons finance com­mit­tee the cen­tral bank is con­cerned. It is his under­stand­ing that “the vast major­ity” of peo­ple tak­ing on longer-term mort­gages could qual­ify for a tra­di­tional 25-year mort­gage. But the trend is adding momen­tum to the real estate mar­ket and “if every­one has a 40-year amor­ti­za­tion mort­gage, then we just have higher house prices and the same avail­abil­ity,” Mr. Car­ney said.

For the moment, the easy debt is help­ing to keep the real estate mar­ket hum­ming, econ­o­mists said. Any dam­age would be down the line.

“The big­ger ques­tion is what hap­pens as you go off two, three, four, five years from now, and it’s no longer just a sig­nif­i­cant share of the new appli­ca­tions, but it’s a sig­nif­i­cant share of the out­stand­ing mar­ket,” said Derek Holt, an econ­o­mist at Bank of Nova Sco­tia. “I think we’ll be in uncharted waters as to the sen­si­tiv­ity to shocks that most house­holds will find them­selves fac­ing.” If there is a shock in jobs, inter­est rates or com­mod­ity prices, “unless you see the arrival of 60-year mort­gages, then you’ve got a house­hold sec­tor that’s really backed itself up against the wall.”

But he and most econ­o­mists agree Canada’s mort­gage mar­ket is sound, and is not sus­cep­ti­ble to the trauma tak­ing place in the U.S., where there were even riskier prod­ucts, a greater use of mort­gage bro­kers, and a stronger ten­dency for banks to sell their mort­gage portfolios.

Dave McKay, head of Cana­dian bank­ing at Royal Bank of Canada, recently said RBC is warn­ing cus­tomers about longer-term mort­gages. Staff tell them costs will go up and there are pit­falls, he said. But cus­tomers are say­ing they still want the longer-term mort­gage to free up cash in the short-term, and they plan to pay them off in less than 40 years with lump-sum payments.

“Cus­tomers have con­sis­tently told us that they plan on man­ag­ing it,” Mr. McKay said. “Whether they can all do it or not is a good question.”

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