June 7th - 2006

The 30, 35-year mortgage: blessing or curse?

Whatever happened to paying down the mortgage faster?

Whatever happened to paying down the mortgage faster? This spring, Canada Mortgage and Housing Corporation (CMHC) and Genworth Financial both announced that they would insure mortgages for longer than the traditional 25 years.

CMHC’s pilot program, which is scheduled to end on June 30, allows Canadians to take out insurance on 30-year mortgages, while Genworth, Canada's other big player in the multi-billion-dollar mortgage insurance game, introduced the 35-year plan. Both CMHC and Genworth state greater affordability as the objective behind these new products. By increasing the amortization period by 5 or 10 years, consumers can make their monthly mortgage payments smaller allowing them to get into the real estate market sooner or afford a more expensive house.

According to Genworth, buyers could reduce their monthly payments by as much as $300 per month on a $400,000 loan at six percent interest. The principal and interest payment would be $2,559 on a 25-year mortgage, $2,379 on a 30-year mortgage and $2,261 on a 35-year mortgage. In addition to regular insurance charges, consumers would be required to pay a surcharge for the longer terms –  0.25-per cent for CMHC and 0.2 per cent, for Genworth’s insurance on a 30-year and a 0.4-per-cent surcharge for its 35 year term.

CMHC’s four-month pilot began March 3 and runs until the end of this month. CMHC plans to assess the pilot results and then determine whether this will be a permanent program. “Should the pilot not continue,” says a CMHC press release, “any applications for mortgage loan insurance approved by CMHC with an extended amortization prior to the end of the pilot will remain eligible for the extended amortization. This will apply even if mortgage funding has not been finalized.”

Mortgaged for life
While extended amortization periods may help some first time buyers afford a home, not everyone agrees that this is a good thing.

David O’Gorman, president, Mortgageland Inc., says extending amortizations by an additional 5 or 10 years does not lower the monthly mortgage payment significantly and the amount of money from each payment that is used to reduce the principal owing is small. O’Gorman compared a $300,000 mortgage at today's five year rate of 5.10 per cent amortized over 25, 30 and 35 years. “There was a difference of about $72,000 in interest paid on the same mortgage amount and same rate between the 25 year and the 35 year, but only a difference of $238 a month on the mortgage payments. That is an additional $72,000 after tax income a family would have to earn and payback.” His biggest concern is that the people who least can afford this program are the very ones likely to use it.

So will the 35-year mortgage be good for REALTORS®? O’Gorman feels it could be beneficial in the short term as it could help sell a few more houses. “However, in the long term I think it contributes to the instability of the whole real estate and mortgage market, and is no good for anyone. Government uses construction and housing development as a way to stimulate the economy when there is a downturn. “What will government use as a stimulus if everyone that has any money is using it to pay mortgage debt?”

To find out more about these 30 and 35-year mortgage insurance products visit the web sites of CMHC and Genworth Financial at www.cmhc.ca or www.genworth.ca.

Make way for the 40-year mortgage
GE Money is banking on Canadians buying into extended mortgages. In April, the Canadian consumer lending arm of General Electric Co. began offering a mortgage amortized over 40 years.

President Rick Lunny said the mortgages are designed to help combat rising home prices and allow easier entrance to the booming housing market. Using the example of a $250,000 home, Lunny said the monthly payment on a traditional 25-year mortgage is $1,600. With a 40-year mortgage, that payment drops to $1,360.

GE Money offers mortgages through brokers in Ontario, Alberta and British Columbia.

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Jean-Adrien Delicano

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