"Discount" Mortgage Payments

Canadian home prices have been on a roll.  Problem is, many Canadians can’t afford them.

This Financial Post story shows how lenders are now making payments within reach, and the cost of it all. 

Points of interest:

  • Average Canadian home price:  $311,101
  • 25-year mortgage payment on this amount:  $1827
  • 40-year mortgage payment on this amount:  $1510
  • Percentage of Canadians amortizing over 25 years:  35%

      (figures based on a $0-down 5.1% five-year mortgage)

30-50 year mortgages are exploding in popularity because they let people afford houses they otherwise couldn’t.  The flipside?  Interest costs.

  • Interest on the 25-year mortgage above:  $237,253
  • Interest on the 40-year mortgage above:  $414,033

Many Canadians seem happily oblivious though.  More and more, homebuyers are living in the moment without concern for their long-term net worth.  Dare I say, it seems eerily similar to the mentality in places like California, at the start of the U.S. subprime era.

Side note: 

The story makes a strong point about pre-paying your mortgage:  “If your mortgage is at 6% and you’re paying with after tax-income based on a 50% marginal rate, you’re getting a 12% guaranteed investment. ‘Where are you going to get a 12% return on your investment?'”

  1. Some people may not be oblivious. I am closing on a house that I just purchased on April 12th, with a 35 year (5 term) mortgage. I knew full well my plan before I started.
    I chose this to keep the actual monthly required payment low in the case of a job loss, accident, miscalculation of funds, or any number of things that can happen causing problems. I still plan on having the house paid for after 10 years if all goes well and 15 if I get stuck somewhere along the way.
    With the pre-payment options of either increasing payments, or making lump sums each year why even bother looking at 25 vs. longer debate. It seems to me the point is to just not purchase a property you can’t afford.
    Personally I like the rule of keeping the range of 2 – 2.5 times your family yearly income is how much you can afford. If you make 50K you should be somewhere from 100K – 125K for a home. If you make 200K then up you go to 400K – 500K.
    Keep in mind blanket rules don’t fit everyone, and that other obligations should always be considered.

  2. Some people may not be oblivious. I am closing on a house that I just purchased on April 12th, with a 35 year (5 term) mortgage. I knew full well my plan before I started.
    I chose this to keep the actual monthly required payment low in the case of a job loss, accident, miscalculation of funds, or any number of things that can happen causing problems. I still plan on having the house paid for after 10 years if all goes well and 15 if I get stuck somewhere along the way.
    With the pre-payment options of either increasing payments, or making lump sums each year why even bother looking at 25 vs. longer debate. It seems to me the point is to just not purchase a property you can’t afford.
    Personally I like the rule of keeping the range of 2 – 2.5 times your family yearly income is how much you can afford. If you make 50K you should be somewhere from 100K – 125K for a home. If you make 200K then up you go to 400K – 500K.
    Keep in mind blanket rules don’t fit everyone, and that other obligations should always be considered.

  3. Excellent points and thanks for the comments!
    Oblivious in this context means unaware. This is, of course, a generalization based on the fact that most Canadians have no real sense for the considerable additional interest these long-term amortizations entail.
    Mind you, this post in no way suggests that long-term amortizations (and other non-conventional mortgage products) don’t have a purpose. I do lots of these mortgages for people with circumstances just like yours.
    Here is a story that outlines cases where these types of mortgages are, in fact, appropriate:
    http://www.myvirtualmortgagebroker.com/news/stories/2007-1-02_Total-Interest.html
    Canadians simply need to be cognizant of the costs. Some people are disciplined, like yourself. They budget properly and pre-pay their mortgage every chance they get. Many more, however, don’t. These are the people for whom this message is targeted.
    Take care and all the best,
    Melanie

  4. Excellent points and thanks for the comments!
    Oblivious in this context means unaware. This is, of course, a generalization based on the fact that most Canadians have no real sense for the considerable additional interest these long-term amortizations entail.
    Mind you, this post in no way suggests that long-term amortizations (and other non-conventional mortgage products) don’t have a purpose. I do lots of these mortgages for people with circumstances just like yours.
    Here is a story that outlines cases where these types of mortgages are, in fact, appropriate:
    http://www.myvirtualmortgagebroker.com/news/stories/2007-1-02_Total-Interest.html
    Canadians simply need to be cognizant of the costs. Some people are disciplined, like yourself. They budget properly and pre-pay their mortgage every chance they get. Many more, however, don’t. These are the people for whom this message is targeted.
    Take care and all the best,
    Melanie

  5. Hi Melanie, my wife and I are looking to buy a house by the end of this year. It is amazing how difficult housing affordability is right now, especially in major cities like we are in Toronto. DO you think that these ridiculously long 40 year amortizations are a sign that we might experience a decade or more of softening / flat real estate prices? It’s a tough thing for me to gauge / understand and beause we’re looking in Toronto and we’re first time buyers, I’m a little nervous plunking $400K + into a house when affordability seems out of the reach of more people now than ever!! What are your thoughts?
    Thanks,
    Savings Journey

  6. Hi Melanie, my wife and I are looking to buy a house by the end of this year. It is amazing how difficult housing affordability is right now, especially in major cities like we are in Toronto. DO you think that these ridiculously long 40 year amortizations are a sign that we might experience a decade or more of softening / flat real estate prices? It’s a tough thing for me to gauge / understand and beause we’re looking in Toronto and we’re first time buyers, I’m a little nervous plunking $400K + into a house when affordability seems out of the reach of more people now than ever!! What are your thoughts?
    Thanks,
    Savings Journey

  7. Just thank your lucky stars you aren’t in Vancouver! :)
    Accurate long-term predictions are virtually impossible. But if I had to choose between jumping into a pit of snakes and predicting the Toronto market, I’d “guess” that demand will continue to outweigh supply. If for no other reason, non-conventional mortgages (50+ year amortizations, 100+% financing, etc.) will allow people to continue “paying up” for property. This and a chug-along economy could very well keep a floor under prices for the short-to-medium term.

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