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Speak Up

The federal government recently announced, as of Oct. 15, 2008, the Canada Housing and Mortgage Corp. (CMHC) will no longer back 40-year mortgages or insure zero-down mortgages.

This is no doubt a method of protecting us from ourselves and to therefore protect our economy from the types of events that are happening in the U.S.

I generally believe in free markets, laissez-faire and the idea that less government is better government. Having said that, there are obvious roles for the government to play in building such things as roads, hospitals, schools and maintaining laws. It is sad to say, though, the government sometimes needs to protect us from ourselves.

This is why we have laws about wearing our seat-belts for instance. It is a shame the government has to create a law for something that is so clearly in our own best interest. Similarly, the Canada Pension Plan is a form of forced savings that makes sure we contribute in some way for our future. You would think people would willingly contribute to such a plan, but I have seen many people pass up other plans at work even though their employer was going to match their contributions.

The environment is another area where we sometimes talk about the responsibility of business and industry to clean up their act or that it is our individual responsibility to be environmentally conscious consumers. This might be true, but it is quite clear to me there will never be meaningful changes unless government forces society to be environmentally responsible. Another case of the government needing to protect us from our sometimes poor choices.

I talk to my kids about making good choices, but I occasionally remind them even adults make bad choices sometimes. In this particular case, the government (through the CMHC) is protecting us and our economy from borrowing on a house with no money down and extending the payments over a 40-year time period.

Borrowing on a home with no money down is a risky venture. In most cases, it would be a very poor choice to make. It would mean that any drop whatsoever in the value of the property would result in owing more than the house was worth. This type of situation is happening currently in the U.S. and is causing financial hardship for many families – not to mention the banks and the economy.

Likewise, there are some legitimate reasons for purposely extending your mortgage over 40-years, but, generally speaking, it is rarely going to be the smart choice. Nevertheless, about 40 per cent of new mortgages last year were of the 40-year variety.

On a $200,000 mortgage costing 5.5 per cent interest your monthly payments (weekly would be better) would be $1023.12 on a 40-year and $1220.78 on a 25-year. At the end of the day, both mortgages will have paid back the principal, but the 40-year mortgage would have cost an extra $124,864 in interest.

If you need to stretch your payments over 40-years and you don't even have 5 per cent as a downpayment, you might want to consider that you can't afford that particular house at this particular time anyway. Otherwise, you have the choice until Oct. 15 to put it into place.

Remember, just because the bank is willing to lend you the money doesn't make it a good choice. In the meantime, I would continue to wear your seat-belt and contribute to the CPP.

The opinions expressed are those of the author and may not necessarily be those of Manulife Securities Incorporated, Member CIPF. Greg MacPherson, BBA, CFP, FMA, CSA, FCSI, is a Financial Advisor in the Woodstock branch. Contact his office with questions or to book an appointment: 328-8889.