September 8th - 2008

Shorter amortization better in the long run

As of October 15th, 40-year mortgages with no money down will no longer be covered through the federal government insurance program administered by Canada Mortgage and Housing (CMHC).

As of October 15th, 40-year mortgages with no money down will no longer be covered through the federal government insurance program administered by Canada Mortgage and Housing (CMHC). Instead, the longest amortization period for a Canadian mortgage insured by CMHC will be 35 years.
 
In addition, a buyer insured by CMHC will have to make a minimum down payment of five per cent of the home's value. The federal government says it is taking this action so Canada’s housing market “remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada.”
 
Mortgage insurer Genworth, and financers like Scotiabank, BMO Bank of Montreal and TD Canada Trust quickly issued statements that they would change their offerings in line with the federal finance minister’s adjustments.
 
While some in the financial world feel the decision could hurt the real estate market, David O’Gorman, President of MortgageLand Inc., doesn’t see this move having a significant impact on the average homebuyer. “In my opinion, the consumer is a winner with this change. While extended amortization periods may have helped some first time buyers afford a home, extending amortizations by an additional five 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. On a $300,000 house the difference is only about $240 a month. Most homeowners will find ways to adjust to paying that extra money and will be out of debt that much sooner.”
 
O’Gorman’s biggest concern is that the 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 now?” He adds that building bigger homes is not the answer. “We don’t need any more 2500 square-foot homes,” he says. “What the government should focus on is making smaller homes more affordable.”
 
In the meantime, existing 40-year mortgages will be grandfathered. Although consumers who acquired these mortgages enjoy lower monthly payments, they will also pay out a lot more for their mortgage over its lifetime. For example, the total interest over the life of a 25-year $300,000 mortgage is about $286,161. That number jumps more than $200,000 to $498,416 over a 40-year amortization period.

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