40-year mortgages now available in Canada

Update: In 2008 the Canadian government took action to eliminate 40-year mortgages.

Mortgage amortization periods of 40 years are now available in Canada through many of the major lenders for both conventional and high-ratio mortgages. The changes are fresh enough that some of the big ones haven’t had the opportunity to update their online mortgage calculators to work with the new terms. Some predict that 50-year mortgages will be available soon.

This will be good news for some buyers who find that increasing house prices are forcing them out of the market. On an average Saskatoon real estate purchase, financed at 5.5% a buyer would essentially qualify to borrow an additional $25,000 by stretching the amortization over 40 years, as compared to the more traditional 25-year term. Of course, that will make a significant difference in the type of home that buyers could consider purchasing.

Borrowers would be well advised to carefully consider the other side of this equation when choosing an amortization period for their new mortgage. A $160,000 mortgage, financed at 5.5% over 40 years will cost the borrower an additional $100,000 over the entire period of the loan. For anyone who cares to do the math, that’s an average of $2,500 per year over the 40 years. If you were to put $2,500 a year into an investment that generated just a 5% return you would accumulate over $300,000 with that money over the same period of time. I do understand that it’s really not so simple an equation, but I believe these things are worth thinking about before one may lock in for the long term.

I can see that this type of a long term approach might make sense under the right circumstances. A young person, or a couple who can feel reasonably confident that their household income will increase, as it normally does as we get older, may take a longer amortization with the goal of shortening it up later when income is stronger. Someone with additional sources of income which the lender refuses to use in qualifying them may be able to qualify based on the longer-term but still plan to pay the mortgage down quicker. There are probably a number of scenarios under which longer-term financing would make sense.

One must remember that the slower you build equity in your home, the more susceptible you are to hardships, particularly if the housing market depreciates and you end up owing more on your home than you can expect to sell it for. In such a situation you are either tied to your home indefinitely or you’re forced to give it back to the bank, destroying your credit in the process.

No matter how you look at it, 40 years is a long time!

Norm Fisher

Royal LePage Vidorra

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