04 Dec 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.
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.