30-year mortgage amortizations are taking over: Four reasons why from @Globeandmail

30-year mortgage amortizations are taking over: Four reasons why from @Globeandmail

Once upon a time, 25 years was the standard amortization on a Canadian mortgage.

Today, no less than 63 per cent of new low-ratio mortgages by value, have amortizations over 25 years. That’s a surge of 11 percentage points in just two years.

Meanwhile, six in 10 Canadians consider longer amortization periods “bad debt practice,” according to a recent survey by Manulife Bank.

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The maximum amortization for a mortgage in this country is generally 35 years, although some non-prime lenders will do 40 years.

So why are so many people extending their amortization when the majority deem it unadvisable? First, some basics:

  • A “low-ratio” mortgage is one with 20 per cent or more equity;
  • “Amortization” is the amount of time you’re allowed to pay back your mortgage;
  • “Extended” amortizations – those over 25 years – are only permitted on low-ratio mortgages.

The trade-off

Canadian’s penchant for extended amortizations is one that’s both costing and saving them a whackload of money.

A 30-year amortization slashes your payment about 10 per cent. But it also costs you over 20 per cent more interest over the life of a mortgage, assuming you don’t make prepayments.

Regulators don’t like this long-amortization trend. It increases risk to the system, they argue, because people accumulate equity slower. Equity is a crucial buffer if times get tough and a homeowner needs to refinance or draw funds for retirement.

People aren’t about to stop taking longer amortizations. Here are four reasons fuelling the trend.

Read the Full article from the Globe and Mail here >>

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