Shorter terms for mortgages may be in Ottawa’s new budget
Somebody tells you you can have a smaller mortgage payment. How do you say no?
That’s essentially what Canadians were offered three years ago when amortization lengths stretched out to 40 years. The cost is generally tens of thousands dollars in interest over the lifetime of a mortgage.
The government finally stepped in and Ottawa lowered the maximum amortization length of a mortgage back to 35 years before hitting consumers again with a 30-year limit last year.
Now word comes that Ottawa may be looking to cut the length again and all eyes are on the March 29 budget to see whether the limit is reduced to 25 — which is where it was, incidentally, when this latest housing boom began.
“The libertarian in me says you are a big boy maybe you should be able to take out a 40-year amortization. But if I want to be part of the nanny state, 25 years is long enough,” says Ron Cirotto, who runs the site amortization.com.
“The problem is everybody plays the same game and they look at the lowest monthly payment and the way to get that is with the longest amortization.”
From a planning point of view, he says “you really have to get that mortgage out of the way” and one way to force yourself is with a shorter amortization.
Think about a $350,000 mortgage, pretty typical in Canada. At a 4% interest rate using a 25-year amortization and paying monthly, the interest would be about $202,000 over that length of time. Stretch your amortization to 35 years and interest costs rise to $298,000.
What does it ultimately do to your monthly payment stretching out that mortgage? Based on 35 years, your monthly payment would be $1,543 but climb to $1,841 at 25 years.
“Sure, it’s an extra $300 a month,” Mr. Cirotto says, “but think of what that $100,000 could do for you at retirement time. It could really help you out.”
The evidence is Canadians will go for the longest amortization available. Will Dunning, chief economist with the Canadian Association of Accredited Mortgage Professionals, says 40-year amortizations climbed rapidly when the product was offered.
“It was pretty clear Canadians were going longer,” says Mr. Dunning, adding the only reason amortization lengths have been dropping is the government ban.
The percentage of mortgages with amortization lengths of 36 to 40 years climbed to 9% from 2006-2011 while lengths of 31 to 35 years jumped to 12%. In the face of the government ban, there is now only 6% of mortgages with amortizations of 36-40 years — the number declining as contracts expire over time.
“It’s all old mortgages,” Mr. Dunning says. “Not everybody who goes that long needs it. Some pay early. The data we have shows people make big efforts to retire the payment.”
At least one Canadian bank thinks Canadians need a little push into the 25-year amortization. Bank of Montreal has twice tried to lure Canadians into a longer term by offering them a rock-bottom rate, with one of the catches being the amortization is limited to 25 years.
“We really think a 25-year amortization is the right choice for most Canadians. It is going to help them pay of their mortgage sooner,” says Katie Archdekin, head of mortgage products at BMO. “They are going to have a mortgage-burning party five years earlier.”
Ms. Archdekin says so many Canadians are trying to get into home ownership now, they need the advantage of that shorter amortization to put them in a better final position later in life.
“We’re going to help them secure a debt-free retirement. We think that’s really important.”